PE Promotes the Industry Integration of Advantage Enterprises
Sina Finance: Under the guidance of the United Front Work Department of CPC Central Committee and All-China Federation of Industry and Commerce, “China Entrepreneur Thought Inheritance and Development Forum” sponsored by the Private Economy Research Institute of Peking University was grandly held in the Century Memory Hall of Peking University during December 28th-29th, 2010. The forum topic is “Inherit the Chinese Business Intelligence, Become the Business Leader in the Future”. Lei CAI, the partner of Jiuding Capital, is as shown in the picture.
Lei CAI: I made a simple PPT due to tight schedule. Good afternoon, everyone. I am Lei CAI from Jiuding Capital. It is a great honor to exchange ideas with you on the platform of Peking University. A lot of experts and scholars have given a speech since yesterday. Now the topic is PE investment. I guess the guests present are from business circles. I communicate with entrepreneurs everyday. Today I will talk about some topics that we focus on during exchange with PE investment institution. So I choose this subject, “PE Promotes the Industry Integration of Advantage Enterprises”. I think that this also attracts the attention of many enterprises within the current economic framework.
There are two prominent features in the development process of domestic economy and industry. One is rapid capitalization, which was mentioned by Mr. Zhou from Sequoia, who also listed data. I wanted to talk about some data. However, there are no accurate statistics. What kind of concept is it? As for me, the Chinese economy from macro to micro and from industry to enterprises will undergo the period of rapid capitalization, for example, the stock market and VC/PE firms including VC exert greater influence on economy. The ratio of stock market value to GDP will be used for measurement. If so, our data will increase quickly in the recent years, and our entrepreneurs will have more frequent contacts with capital market.
I will give a simple introduction on the reasons foe rapid capitalization.
First, the capitalization level of the Chinese economy and most industries is very low. It is easy to understand. The capitalization level of industries like telecommunication, petrochemical and bank is comparatively high, but the main enterprises in most industries are unlisted companies. There are more than 2,000 listed companies on A-share market, 6,000 in Japan and 18,000-20,000 in the USA. So the economic capitalization is comparatively low in China.
Second, the Chinese local enterprises and stock market are under the stage of capacity expansion and listing in a fast speed. According to the data listed by Mr. Zhou from Sequoia, over 400 Chinese local enterprises were listed in the past 11 months, a rather big number compared with more than 600 worldwide. The capitalization of many enterprises is reflected in the rapid and continuous capacity expansion of A-share main board and second-board market as well as IPO. Furthermore, a lot of enterprises including Sequoia were successfully listed in the USA, winning popularity and higher recognition in the foreign capital market. Meanwhile, capitalization also enjoys favorable conditions now.
Third, a large number of VC/PE firms have been established in an era of PE nationwide. People wearing a suit in Beijing, Shanghai and Shenzhen are common. If you see at a hotel in the central and western regions, they were insurance sales agents in the past, and are PE specialists now.
Fourth, it is also the reflection of results. If the enterprise takes the lead in obtaining the support of capital market earlier, it will possess absolute advantages in the industry, i.e. capital strength, brand influence, resource and team advantages. It is an asymmetric status compared with its competitors. This situation will stimulate more enterprises to list and promote industry concentration or it will eliminate all rivals, all of which are possible.
The above is our observation and summary. The first feature of domestic economic industry development is rapid capitalization.
The second feature is the acceleration of industry concentration, which has a deep impact on our economy and industry. The Chinese economy enters a period of rapid concentration, which is similar to the first feature. The distribution of most domestic industries is disperse, while the industries such as petrochemical, telecommunication, steel, cement, etc. feature high concentration. Most of domestic industries are relatively disperse, and many industries are at the stage of acceleration of concentration.
No systematic study on the reasons for acceleration was conducted. I only list some enhancing factors:
The first factor is the change of development pattern, which is a big change. In particular, the era of pure market expansion passed in the past 20-30 years after reform and openness.
The second factor is the elimination of competition barriers. In the past, many domestic provinces and prefecture-level cities have small-scale and all industries such as cement, steel, etc. However, the regional protectionism is substantially weakened. The administrative factors which influence competition are gradually eliminated.
The third factor is the drive of capital market. After acquiring the support of capital market, many enterprises are able to promote the rapid concentration of industries.
Besides, the power of government administration is also crucial. Especially in the industries related to national welfare and people’s livelihood, the government promotes industry integration. Of course, there are many other factors.
The acceleration of industry concentration is the second feature of Chinese economy or industry development. It will approach the industrial structure in market economy. What kind of structure is it? The top 5 or 10 enterprises in one industry or one trade occupy about 80% market shares.
These are the two important features which influence the Chinese economy and enterprise development, which bring many opportunities and challenges to the entrepreneurs present, enterprises and PE firms. It may be an opportunity or a severe challenge if you are not well-prepared. Under this condition, the selection of development strategy will be involved.
How to select strategy? For advantage enterprises, there are only two choices, one is entering capital market, the other is leading industry integration. In fact, many enterprises lack a full understanding of the above-mentioned opportunities and challenges. Both enterprises and investment institutions are involved with selection of strategy. PE firms get profit by investing in enterprise equities. To be a remarkable PE firm, you can only choose to invest in outstanding and advantageous enterprises and assist enterprises in participating in the two trends, capitalization and industry concentration. Unfortunately, the Chinese local PE firms focus on the first opportunity, i.e. obtaining income by listing. In fact, many PE firms do not have the capabilities to promote industry concentration, which is the current situation of PE firms.
In the end, I will give an introduction about the development of Jiuding Capital. Jiuding Capital develops fast in the favorable market environment and ranks first among the Chinese local private enterprises in this industry. We lay special emphasis on promoting industry integration of enterprises. How do we do? Firstly, it is positioning. We take charge of financial investment, while the enterprises conduct industry integration by virtue of the capital and service we provided. Secondly, it is concept. We will guide the enterprises to deeply realize the importance of industry integration and capital market to enterprise development in the process of communication. Thirdly, it is resource. The industry integration relies on resources. Jiuding Capital owns three big resources. One is the business system nationwide. Jiuding Capital is famous for the largest business team in China, while it is unavailable for most of investment institutions. Meanwhile, we have professional members and teams all over the country. Besides, the second resource is our enterprise group. We have invested in 70-80 enterprises, more in the future. The third resource is fund contributors. We mainly rely on these three resources. Afterwards, it is all about operation what we conduct such as searching, designing schemes, coordinating with the local departments, bridge finance, M&A, etc.
Finally, I will share some cases. In the beginning, we only obtained profit of 20 million yuan by making investment in Gifore. It has become the domestic large enterprise in sales of agricultural machineries after listing in September of last year in the second-board market. It completed industry integration in Sichuan and southwestern regions before listing, and we assisted it with industry integration in the northeast and northwest regions. Due to limited time, now I give a simple introduction on how PE firms promote industry integration of advantageous enterprises and help to achieve better development of these enterprises.
- Jiuding Group
- JT Asset Management
- JX AMC