L.E.K.'s Karin von Kienlin recently presented at BVK on a study conducted by L.E.K. Munich and Shanghai. They wished to: - Understand developments in Chinese equity investments in both the domestic China / pan-Asian market and cross-border investments between China and Germany / Europe - Identify trends in likely future investment behavior and its drivers - Defining success factors both for Chinese and German investors / corporates as to how to benefit from the potential opportunities of cross-border investments and cooperation Learn more in the presentation here.

1. Bangkok
BVK
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China Exit or Co-Investment Opportunities
for German PE Investors
Chicago
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Milan
November 26, 2013
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© 2013 L.E.K. Consulting LLC. All rights reserved.

2. Agenda
Agenda
 Introduction
 Macroeconomic backdrop
 Co-investments and Exits
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3. Introduction
L.E.K. Consulting is a leading global strategy consulting firm
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Founded in 1983, with a presence in
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4. Introduction
Introduction
 This document summarizes results of a study conducted by L.E.K. Munich and Shanghai
 The goals of the study are to
-
Understand developments in Chinese equity investments in both the domestic China / pan-Asian
market and cross-border investments between China and Germany / Europe
-
Identify trends in likely future investment behaviour and its drivers
Defining success factors both for Chinese and German investors / corporates as to how to benefit
from the potential opportunities of cross-border investments and co-operation
 The study is based on
-
Discussions with 50 representatives of senior investment and corporate professionals in Shanghai,
Beijing and Hong Kong
-
Project experience
Extensive secondary research
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5. Agenda
Agenda
 Introduction
 Macroeconomic backdrop
 Co-investments and Exits
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4

6. Macroeconomic backdrop
While Germany’s population is expected to continue to decrease, China’s
population is forecast to continue to grow at 0.5% p.a.
China’s population
(2005-2018f)
Germany population
(2005-2018f)
Billions of people
Forecast
CAGR%
(2005-12) (2012-18f)
Billions of people
Forecast
CAGR%
(2005-12) (2012-18f)
1.4
1.4
(0.1)
(0.1)
0.5
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.5
0.0
200506 07 08 09 10 11 12f 13f 14f 15f 16f 17f 18f
200506 07 08 09 10 11 12f 13f 14f 15f 16f 17f 18f
Source: IMF
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7. Macroeconomic backdrop
The increasing urbanisation and prosperity of the Chinese population will create
massive middle-class demand by 2020
Age distribution (2012E)
Share of rural population
(2005-15)
Percent
100
9
21
Percent
65+
100
80
China
80
60
74
66
40
Germany
60
15-64
40
20
20
13
17
Germany
0-14
China
0
0
2005 06 07 08 09 10 11 12 13 14 15
Share of urban households
by annual household income in China*
Percent
100
147m
226m
0
1
2
6
ΔPPT
(2005-10) (2010-20)
328m
6
2
4
51
Mainstream (USD16k-USD34k) 5
45
36
Value (USD6k-USD16k)
Affluent (>USD34k)
80
60
63
82
40
20
36
10
0
2000
7
2010
Poor (<USD6K)
19
(46)
(26)
(3)
2020
Note: * In real 2010 dollars; in 2010, USD1=RMB6.73
Source: IndexMundi; L.E.K. research and analysis
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8. Macroeconomic backdrop
China’s GDP only overtook Germany’s in 2007 but is now more than double and
expected to grow at c.10% until 2018
Germany nominal GDP
(2005-2018f)
China nominal GDP
(2005-2018f)
CAGR%
(2005-12) (2012-18f)
CAGR%
(2005-12) (2012-18f) Trillions of USD
Trillions of USD
16
Forecast
3.0
16
2.6
14
14
12
12
10
Forecast
10
14.9
20.3
10.6
13.5
12.2
11.0
10.0
9.0
8.2
8
8
6
6
7.3
5.9
4.5
4
2.8 2.9
3.3
3.6
3.3 3.3
3.9 4.0
3.6 3.4 3.6 3.7 3.7 3.8
4
3.5
2.3
2
2.7
2
0
5.0
0
200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f
200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f
Source: IMF
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9. Macroeconomic backdrop
China has a much larger working population however continues to be much less
industrialised and service oriented…
Share of employees employed in selected
industries 2010
Percent
100
427m

17m
Utility
Trade
The Chinese population in
employment in 2010 amounted to
761m
-
Post, Telecom and Transport
Mining and extraction
80
Metals
Industrial
about half of the population
worked in the industries/
company categories under
analysis
Healthcare and Pharma
60

Consumer
Construction
Chemicals
The remainder worked among
others in such industries/
company categories as
-
small producing enterprises
(sales below c.€600k )
-
public administration,
including defence
-
Automotive
40
finance and insurance
Agriculture
20
education, science,
technology and art
0
China
Germany
Source: L.E.K. research and analysis
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10. Macroeconomic backdrop
... with per capita output continuing to be much lower than in Germany
Germany nominal GDP per capita
(2005-2018f)
Thousands of USD
44
40
34
CAGR%
(2005-12) (2012-18f)
Forecast
50
40
China nominal GDP per capita
(2005-2018f)
46
44 45
44
40 41
47
48
49
3.1
2.8
Thousands of Euros
Forecast
CAGR%
(2005-12) (2012-18f)
19.7
50
9.9
42
40
35
30
30
20
20
10
10
3.7 4.4
2.6 3.4
1.7 2.1
0
6.6 7.3
5.4 6.1
8.0 8.8
9.7
10.7
0
200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f
200506 07 08 09 10 11 12 13f 14f 15f 16f 17f 18f
Source: IMF
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11. Macroeconomic backdrop
An important driver of Chinese growth will be productivity improvements
Output per employee by industry 2010
Thousands USD per employee
240
China
180
Germany
120
60
0
Food &
beverages
Chemicals
Pharma
Basic metals
Medical &
Surgical
equipment
Transport
equipment
Electricity,
gas & water
Industrial Construction
production
(exc
construction)
Transport
& storage
Consumer
goods
Output by industry in
trillions USD
103
110
23
183
1
117
102
1647
249
101
354
China
43
39
19
25
3
89
54
54
97
103
110
Germany
Source: L.E.K. research and analysis
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12. Macroeconomic backdrop
Germany still maintains a technological edge while China is catching up in the
number of patent applications (not all of which may qualify as true innovation)
Patent applications published by industry
over 2000-2009
Thousands of patent applications
China
500
Germany
400
300
200
100
0
Chemical
Communication
and Computers
Consumer
goods
Industry
Pharma and
Medical
Source: L.E.K. research and analysis
Transport
Other
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13. Macroeconomic backdrop
Summary observations
 China continues to be an important market for German companies
-
Continued population growth
Attractive young demographic with lots of demands
Increasing urbanisation
Increasing per capita income and prosperity
Appetite for Western consumer brands and high tech products
 China is orienting towards the West
-
Still very much an agricultural society with relatively small but growing industrial and services sector
Improving productivity – but long way to go
Working on R&D and innovation – partial catch up but still major gaps
Combining China market demand with German market “supply” can be a powerful
investment thesis
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14. Agenda
Agenda
 Introduction
 Macroeconomic backdrop
 Co-investments and Exits
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15. Co-investments and exits
While still focused on Asian investments, in particular Chinese PE firms have
raised increasing fund sizes and are open to international investments
 US and European private equity funds have been investing in China for years and have dominated the
market
 However, local funds are catching up in number (c.130 local funds), size (raising single digit billions by
fund) and in competitiveness (international training, local knowledge and connections)
 The investment focus continues to be China or pan-Asia, however portfolio diversification and attractive
investment opportunities in the West are driving initial cross-border investments
 Investments tend to be out-right acquisitions, usually led by large, often state-owned Chinese corporates;
-
However, co-investments with Western players or minority stakes in corporates with the goal of
driving China market development for that company are common in PE
 The main deal rationales for such deals is the synergy value derived from
-
a valuable Western consumer proposition / brand
leading Western technology
Western market access
global competitive benefits from acquiring a leading Western player
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16. Co-investments and exits
Chinese private equity firms have reached large sizes and have become credible
bidders in international auctions
Top-10 Private Equity companies headquartered in China and Hong Kong
Name
Headquarters
Asset under
management ($bn)
Focus of investments
1
CDH Investments
Beijing
8.0
Mainly China
2
Hony Capital
Beijing
7.1
Mainly China
3
PAG
Hong Kong
7.0
Mainly Asia
4
RRJ
Hong Kong
5.8
China ,South East Asia,
some US and Europe
5
Baring PE Asia
Hong Kong
5.0
Mainly Asia
6
CITIC Capital
Beijing
4.6
Mostly China, Japan, US and
Europe
7
Affinity Equity Partners
Hong Kong
4.0
Mainly Asia
8
Unitas
Hong Kong
4.0
Mainly Asia, some Europe
9
SAIF
Hong Kong
3.5
Mainly Asia
10
IDG Capital Partners
Hong Kong
2.5
Mainly China, some Europe
Source: L.E.K. research and analysis
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17. Co-investments and exits
Several new focus industries selected by the China State Council for future
development might represent an opportunity for Western PE when exiting
Old pillar industries
New strategic and
emerging industries
National defense
Energy saving and environmental
protection
Telecommunication
New energy (nuclear, solar, wind,
and biomass)
Electricity
Clean energy vehicles (PHEVs and
electric cars)
Oil
New materials (special and high
performance composites)
Marine shipping
Many industries directly
contribute to China energy and
environment goals
Biotechnology
Airlines
It is specifically targeting for
China to become world leaders
within the 12th 5 year plan

High-end manufacturing
In September 2010, The State
Council, China’s cabinet,
selected seven national
strategic industries that it
hopes will advance the nation’s
economic development and
also better serve internal
demand

Coal

Next generation information
technology
Source: Stake Council, NRDC, L.E.K. analysis
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18. Co-investments and exits
Only a couple of weeks ago, the 3rd plenary session of the CPC Central Committee
is seen to further open up the Chinese economy

The Third Plenum of each Central Committee is often the time for revealing massive changes in economic policy and the
launching of political reforms

There have been two particularly significant Third Plenums in the history of the People’s Republic of China:
-
the 1978 Third Plenum of the 11th Central Committee, held two years after the death of Chairman Mao Zedong, ended the
Cultural Revolution and launched the “reform and opening up of China” under Deng Xiaoping
-
and the 14th in 1993, held under Jiang Zemin, set the stage for China’s transition to a socialist market economy and led to
more aggressive economic reforms promoted by Zhu Rongji

President Xi Jinping and Premier Li Keqiang have presented a series of new policies intended to boost the China market

The eight key areas that the Plan especially addresses include:

cutting administrative approvals
promoting competition as well as free flow of international and domestic trade and investments
land reform
opening up banking including the liberalisation of interest rates and the exchange rate
reforming the fiscal system including setting up basic social security
reforming state-owned enterprises
promoting innovation including green technology
opening up the services sector
Within these, the Plan has identified three major breakthrough sectors:
-
lower market barriers to attract investors and boost competition
setting up a basic social security package
allowing collectively-owned land to be traded
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19. Co-investments and exits
Cross-border deals with DACH targets funded by the Chinese are increasing; most
are lead by Chinese corporates, often with an intransparent shareholder structure
Selected Chinese investments into DACH region by bidder type
(2008-13)

Number of deals
-
16
16
14
Chinese investment in Germany is driven by
SOE*s and more recently by PE, and POE**
13
12

10
10
However, definitions can be blurred as
corporates often are part-owned by
government or have an intransparent
shareholder structure
Investments were largely made into automotive,
industrial products companies: more known
cases included
8
-
KSM, Preh, Sellner, ATB, Kiekert, FbZ
Formenbau, Steyr Motors
6
-
Kion, Putzmeister, Flex, KSL
Sondermaschinen, Oerlikon
Textilmaschinenkomponenten
Government
4
2
Private Investor*
3
Private Equity
2
Corporate
1

-
0
2008
Other sector targets include IT and RCG
2009
2010
2011
2012
Medion, Eterna
2013***

Note: * state owned enterprises; * privately owned enterprises; *** as of October 2013
Source: Mergermarket; L.E.K. research & analysis
18
The two government-backed deals were through
aviation businesses acquiring Thielert and
Fischer Advanced Composite Components
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20. Co-investments and exits
Kion Group has attracted the largest direct Chinese company investment in
Germany to date

In August 2012, Weichai Power, a unit of China’s Shandong Heavy
Industry Group, completed a €738m investment in Kion, the
German forklift truck maker
-
€467m to acquire a 25% stake in Kion directly, and a further
€271m for a 70% stake in a Kion hydraulics subsidiary

The deal was touted as a way for Kion to build more access to the
Chinese market, c.25% of global demand for forklifts

In June 2013, Weichai Power acquired another 5% ahead of the
IPO at the end of June 2013
-
Financial and stock performance has steadily improved
primarily driven by demand from emerging countries
Deal summary
Target
Kion Group GmbH
Bidder
Weichai Power
Deal terms
€738m (25% stake)
Deal rationale
● Kion plans to grow in Asia through partnership with
Weichai
● Weichai gets access to Kion’s expertise in high-end
industrial trucks
Source: Financial Times; Mergermarket; company websites
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21. Co-investments and exits
In terms of exits to Chinese investors, Putzmeister has been the most sizeable
transaction to date

In January 2012, Putzmeister, a global manufacturer of
construction machinery based in Germany, was acquired by Sany
Heavy Industry, a China-based conglomerate

Sany Heavy Industry is owned by CITIC, a prominent Chinese
fund
The merger created one of the world’s largest construction
manufacturing companies
“… The deal could herald a new era of Chinese deal making in Europe as
Chinese companies look to “go global” and reduce their exposure to their
domestic economy …”
Financial Times, Jan 2012
Deal summary
Target
Putzmeister
Bidder
Sany Heavy Industry
Deal terms
c.€324m (90% stake)
Deal rationale
● Sany resolves Putzmeister’s succession issues
and provides strong financial capital
● Sany leverages the Putzmeister brand and
engineering prowess as it seeks to create a global
Chinese construction equipment brand
Chairman of Sany Heavy Industry Liang Wengen and
Putzmeister CEO Norbert Scheuch
Source: Bloomberg; Financial Times; Mergermarket; company websites
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22. Co-investments and exits
Despite often high strategic premium price offers and compelling strategic logic of
a deal, there are often material obstacles that need to be overcome
Challenges
Mitigating Factors

Intermediation and mutual education / communication

Clearer communication of key investment hypotheses
and involvement of target management / shareholder in
evaluation thereof
Rationale for China strategic premium not obvious
leading to distrust from sellers as to how real the bids
are

Expectations management on both sides

Early review and communication of potential issues

Deal approval risk


Political risk
In the short-term, focus on strategic cooperation with
little operational overlap; medium- to long-term
operational collaboration in areas where it makes sense

Doubts regarding access of bidder to finance and
confirmation of financing terms

Concern about capability of bidder to manage global
operations and retain core assets (Minority shareholders,
Management, staff, Brand)

China corporates and investors still primarily focused on
China and pan-Asia

lower levels of comfort and confidence in European
deal environment
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23. Summary observations
 China investors, both corporate and financial, will increasingly be looking at investment opportunities
beyond the domestic markets
 Of particular interest for Chinese investors are companies that
-
Are related to China focus industries
Bring a European brand to the Chinese consumer
Help develop Chinese corporates in their globalisation by bringing valuable technology and / or
brand to the table
 Of particular interest for Western / German investors are
-
Flexible strategic equity investment (minority / co-investment as well as lead investments) in
companies which are less interesting for European PE or strategies
-
China market access
Strategic partnership to defend and build global market position
 There are material challenges as with many cross-border deals, however these are often really dealdependent and over time they are on average likely to become less of an issue
Keep Chinese investors on the radar for both co-investment and exit strategies
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