M&As Decline in Q1 15 after the Boom in 2014; Enterprises Listed in the New

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1 Vol. 43 Apr. 30 th, 2015 Latest Report M&As Decline in Q1 15 after the Boom in 2014; Enterprises Listed in the New Third Board Become Hot M&A Targets By Alex Yan, Zero2IPO Research Center According to PEdata under the flag of Zero2IPO Group, a famous VC & PE research institute in Greater China, China s market saw 357 M&As completed in Q1 15, down 4.0% year-on-year and 41.6% quarter-on-quarter; the trading value of 341 deals were disclosed and involved US$17.66B in total, down 24.4% year-on-year and 34.4% quarter-on-quarter. Both the number and transaction value of the M&As showed a downward trend in Q1 15 following the historical high reached in Concretely speaking, domestic M&As numbered up to 303 and involved US$12.51B; outbound M&A numbered 40 and involved US$4.55B; inbound M&A numbered 14 and involved US$607.30M. PEdata also suggests that in Q1 15, 314 M&As were announced to be underway, and 265 of them with the trading value disclosed involved US$41.38B. Besides, 48 M&As in the quarter were connected transactions (The 48 deals were not included in the 357 deals already completed), 47 of which had the trading value disclosed to be US$12.12B.

2 Preferential Tax Policies Fail to Reverse the Decreases in M&As In January 2015, the Ministry of Finance and the State Administration of Taxation released a notice to adjust the special policies about deferred enterprise income taxes during the M&A process. On a specific term, when an enterprise acquires equities or assets, the minimum proportion of the acquired equities or assets is lowered to 50.0% from 75.0%; the deferred tax policy is also applicable to the transfer of equities or assets in the book value between parent companies and their wholly owned subsidiaries. This makes the special tax policy available to more enterprises involved in M&A. That is, 2

3 relevant equities or assets are priced based on historical costs and enterprise income taxes will not be levied for the time being. The new tax policy undoubtedly provided a dividend for the M&A market, which, however, showed a trend of decline following the boom in 2014 when much M&A demands were met and the Spring Festival holiday in February In Q1 15, Chinese enterprises completed 303 domestic M&As, a slight year-on-year decline of 2.3% and a quarter-on-quarter slump of 45.7%; in particular, 291 deals with the amounts disclosed involved US$12.51B, down 7.0% year-on-year and 38.6% quarter-on-quarter. Following the surge in 2014, outbound M&As by Chinese enterprises showed a slight decline in early Q1 15 saw 40 outbound M&As completed, down 14.9% from 47 in the same period of 2014 and 2.4% from the previous quarter, which indicated the somewhat dampened enthusiasm for outbound M&A; the trading value of outbound M&As experienced a sharper drop of US$4.55B, down 41.9% year-on-year and 15.8% quarter-on-quarter. As domestic investors gained richer experience in outbound M&A and governments offered support and guidance, finance, electronic & opto-electronics equipment, energy & mineral, automobiles and construction/engineering had outstanding performances in outbound M&A. But with the slowdown in domestic economic growth in Q1 15, there were fewer big deals on a year-on-year basis; the deal with the biggest amount was the acquisition of Louvre Hotels Group by Jin Jiang Hotels, which involved US$1.48B, and the trading value of every other deal was less than US$800.00M. 3

4 As for inbound M&A, the State Administration of Foreign Exchange released the Notice on Further Simplifying and Improving Policies for Administration of Foreign Direct Investment (HF[2015]No.13) in February 2015, which explicitly proposed to simplify registration for confirming contributions by foreign investors under domestic direct investment. The policy cancels the registration for confirming non-monetary contribution by foreign investors under domestic direct investment and registration for confirming foreign investors acquisition of equities of their Chinese counterparts, and changed the registration for confirming monetary contribution by foreign investors to registration for entering monetary contribution into accounts under domestic direct investment. As the policy was implemented as of June 1, 2015, inbound M&As were relatively steady instead of surging in the quarter, but the trading value involved fell sharply. Q1 15 saw 14 inbound M&As completed, a mild year-on-year drop of 6.7% but a quarter-on-quarter growth of 16.7%; the trading value of all the inbound M&As were disclosed and totaled US$607.30M, down 71.1% from US$2.10B in the same period of 2014 and 47.4% from Q

5 Emerging Industries Have Outstanding Performance; Enterprises Listed in the New Third Board Become Hot M&A Targets In terms of industrial breakdown, the 357 M&As completed in Q1 15 were distributed in 22 Grade 1 industries, including clean-tech, bio/healthcare, real estate, IT, Internet and machinery manufacturing. In terms of the number of M&As, clean-tech has topped the list for the first time with 32 deals, accounting for 9.0% of the total; bio/healthcare, an emerging industry which experienced a boom in 2014, completed 31 deals in Q1 15, 8.7% of the total; the second runner-up was real estate, which ranked the first last year and reported 30 deals in Q1 15, representing 8.4% of the total. In terms of M&A value, chain retail rose to the top with US$1.90B, 10.8% of the total. That s attributed mainly to the acquisition of Louvre Hotels by Jin Jiang Hotels at US$1.48B, which raised the average M&A amount of the industry to US$173.13M, the highest of all the industries; finance maintained the second place with US$1.69B, accounting for 9.6% of the total. That s thanks to the acquisition of Standard Bank by ICBC in January at a price of US$770.00M; Internet came third with US$1.64B M&A value, 9.3% of the total. On the whole, M&As were much less active in Q1 15 due to the financial stress on traditional industries and national policy regulation. Meanwhile, amid the economic transformation, enterprises are eager to enter emerging industries through M&As. Besides, with the continued impact from fast-growing e-commerce, traditional chain retail enterprises have increasingly turned to M&A for bigger sizes and greater market competitiveness. Real estate and machinery manufacturing, which were 5

6 flourishing in 2014, were outperformed by emerging industries and retail, and the focus of M&A has gradually shifted to emerging high-growth industries, asset-light industries like consumer goods and some quality industries in manufacturing, such as health services, cultural communication, computer communication and Internet services. Compared with other micro, small and medium-sized enterprises, the companies listed on the New Third Board are more regulated and transparent, which undoubtedly improves their competitiveness as the targets of acquisition. In 2015, the New Third Board is gradually becoming a target market for enterprise M&A. In particular, Esdlumen was wholly acquired by LianTronics at a price as high as US$79.43M and thus indirectly listed on ChiNext. Meanwhile, with the launch of the market-making system, the market makers in the New Third Board are vigorously expanding presence. In particular, Shanghai Eshop Technology Co., Ltd. was acquired by Orient Securities Co., Ltd. at US$2.94M, and Guangdong Taienkang Pharmaceutical Co., Ltd. was acquired by three companies including GF Securities at US$9.51M. 6

7 As for industrial breakdown, VC/PE-related M&As involved 18 Grade 1 industries, including IT, Internet, clean-tech, bio/healthcare and machinery manufacturing. As for the number of M&As, emerging industries ranked the top three in the quarter, with IT topping the list with 20 deals and representing 10.8% of the total; Internet came second with 19 VC/PE-related M&As, 10.3% of the total; clean-tech ranked third with 16 deals, 8.6%. As for M&A value, chain retail was also in the first place, with US$1.79B in total (15.7% of the total trading value of VC/PE-related M&As) and US$298.34M on average; finance was the runner-up, with 12 VC/PE-related deals involving US$1.28B in total, 11.2% of the total, and US$116.68M on average; telecom & value-added services jumped to the third place with US$1.24B, 10.8% of the total. 7

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9 BPEA News The index of development of Beijing Private Equity industry in the second half of 2014 released On April 2 nd, 2015, under the guidance of Beijing Municipal Finance Bureau, Beijing Financial Development Centre, China Association of Private Equity (CAPE) and Beijing Private Equity Association (BPEA) jointly issued the index of development of Beijing Private Equity industry in the second half of 2014 (2014 H2 Beijing PE index) H2 Beijing PE index is , in which the fund raising index is , the investment index is , the exit index is , the confidence index is >Read more No. 18 th of SmartMatch roadshow successfully held in BPEA With the support of BPEA, No. 18 th of SmartMatch roadshow successfully took place in Beijing on April 9 th, In this activity, three high quality projects which respectively focused on coffee industy chain, O2O and 3D virtual fitting were introduced to investment professionals who attended 9

10 this meeting. >Read more No. 19 th of SmartMatch roadshow successfully held in BPEA With the support of BPEA, No. 19 th of SmartMatch roadshow successfully took place in Beijing on April 22 nd, In this activity, two projects are both focused on finance area. More than 10 investment professionals attended this activity. >Read more The 9th PE exits Training Program: the South Korean capital market. successfully hosted The 9th PE exits Training Program: the South Korean Capital market, took place in Beijing on April 15 th. More than 20 investment professionals participated in the training course. Zhao Qingxun, the general manager of investment banking department of Yuan Da (South Korean) Securities, introduced the environment of South Korean capital market and related successful cases. >Read more 2015 Innovation of Finance Services Summit in Guizhou Was Held Successfully On March 27 th, 2015, one of the PE into high technology zone activities Innovation of Finance Services Summit was held in Guiyang, Guizhou Province. The summit was jointly hosted by CAPE, The people's Government of Guizhou province finance office, Guiyang comprehensive free trade zone management committee and BPEA. This summit include three parts, which is innovation of finance service conference, private equity training programme and to investigate the investment opportunities in Guiyang comprehensive free trade zone. >Read more BPEA Upcoming Events CHINA FINANCIAL SUMMIT 2015 May 12 th -13 th, 2015, Beijing China Beijing International High-Tech Expo (CHITEC for short) is cosponsored by the Ministry of Science and Technology, the Ministry of Industry and Information, State-owned Assets Supervision and Administration Commission of the State Council, the China Council for the Promotion of International Trade, the State Intellectual Property Office and Beijing Municipal Government with the approval of the State Council. Chinese government leaders have made their appearances in this event. As an important forum of CHITEC, China Financial Summit (CFS) will be held in Beijing on May 12 and 13, 2015 in Beijing Westin Hotel Financial Street, with the theme of Financial Innovation and Service in the Economic New Normal. Our Summit would mainly discuss the annual hot topics on macro-economy and financial industry, especially on the international macro-economic environment 10

11 with significant effect to the Chinese Economy, Global Economic Integration, Opening Financial Market, Financial Innovation and so on. Leaders attending the former forums are from the Ministry of Finance, the People s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, Beijing Municipal Government, Export-Import Bank of China, Industrial and Commercial Bank of China, China Construction Bank and so on. The Summit will invite leaders from ministries (such as the National Development and Reform Commission, the State-owned Assets Supervision and Administration Commission of the State Council, People s Bank of China, CBRC, CSRC, CIRC, etc), related international organizations (such as World Bank, Asian Development Bank and IMF), famous economists, and top leaders from financial institutions, transnational corporations to deliver speeches and make dialogues. The representatives attending the Conference are mainly from enterprises and financial institutions with great influence both at home and abroad. The form of Summit is diversified, aiming to promote the attendees to share ideas, discuss issues and find out the solutions to problems. Hereon, we sincerely invite you to participate in the China Financial Summit 2015 and hope you could find developing opportunities in our Summit. Spring goes everywhere in Beijing, which is full of vitality and vigor in May. We firmly believe that the Summit will be a greater success with your support and participation. We are looking forward to meeting with you in Beijing! CFS host: China Banking Association Insurance Association of China China Association of Private Equity Asset Management Association of China More information, please find here: 11

12 Beijing Private Equity Association (BPEA) was established on Jun 20, 2008 北京股权投资基金协会成立于 2008 年 6 月 20 日 BPEA committed to: 协会致力于 促进行业环境建设 维护会员合法权益 培养相关专业人员 Promote the issuance of preferential policies for PE industry Build the self-regulatory discipline of PE industry Safeguard the legitimate rights of members Research development trends of PE industry Train relevant professional individuals Cooperate with domestic and overseas institutions 建立自律监管机制 研究行业发展动向 组织内外交流合作 协会服务中心 : 为会员及相关从业人士提供 : 专业咨询 辅 导 基金注册 备案 商务会议 培训等服务 BPEA Service Center: BPEA provides services for members and relevant industrial individuals: professional consultation and guidance, fund registration and recording, business conference,training and so on. 协会主要成员 BPEA main members include: 邵秉仁 原国家经济体制改 革委员会副主任 Former Deputy Director of the State Economic System Reform Commission 方风雷 董事长 厚朴投资 Fang Fenglei, Chairman of HOPU Investment 李爱庆 董事长 北京科桥投资 Li Aiqing, Chairman of Beijing Co-Bridge Investment Advisor Ltd. 衣锡群 常务副会长 中国股权投资基金协会 Yi Xiqun, Executive Vice Chairman of CAPE 赵令欢 弘毅投资总裁 联想控股有限公司常务副总裁 John Zhao, CEO of Hony Capital, Executive Vice President of Legend Holdings 刘乐飞 首席执行官 中信产业基金投资管理有限公司 熊晓鸽 创始合伙人 IDG 资本 Hugo Shong, Founding General Partner of IDG Capital Partners 吴尚志 董事长 鼎晖投资 Wu Shangzhi, Chairman of CDH Investments 何小锋 教授 博导 北京大学经济学院金融系 Professor and Doctoral Advisor of the Finance Department of the Economics School at Peking University 田溯宁 创始合伙人 董事长 宽带资本 Edward Suning Tian, Founder and Chairman of CBC Capital 沈南鹏 创始及执行合伙人 红杉资本中国基金 Neil Shen, Founding Managing Partner of Sequoia Capital China 阎焱 首席合伙人 赛富亚洲投资基金 Andrew Y.Yan, Managing Partenr of SAIF Partners 张懿宸 首席执行官 中信资本 Zhang Yichen, CEO of CITIC Capital 于剑鸣 管理合伙人 新天域资本 Yu Jianming, Managing Partner of New Horizon 靳海涛 董事长 深圳创投 Jin Haitao, Chairman of Shenzhen Capital Group Co.Ltd 唐葵 总裁 合伙人 方源资本 Frank Tang, CEO and Managing Partner of FountainVest Partners 杨向东 董事总经理 凯雷投资集团 凯雷亚洲基金联席主管 Xiang-Dong (X.D.)Yang, Managing Director and Co-Head of Carlyle Asia Partners ("CAP") 刘晖 合伙人 太盟产业基金 Allan Liu, Partner of PAG Capital 殷荣彦 董事长 北京股权投资发展管理有限公司 Yin Rongyan, Chairman of Board, Beijing Equity Investment Development Management Company 熊焰 董事长 总裁 北京金融资产交易所 Xiong Yan,Chairman and President of China Beijing Financial Assets Exchange 联系方式 电 邮 地 邮 单祥双 创始人 董事长兼总裁 中科招商集团 Shan Xiangshuang Founder,Chairman and President of CSC GROUP Liu Lefei,CEO of CITIC Private Equity Funds Management Co., Ltd. 话 传 真 箱 bpea@bpea.net.cn 网 址 址 北京市西城区金融大街甲 9 号金融街中心南楼 902 编 Contact us: Tel: Fax: bpea@bpea.net.cn Website: Room No.902, South Building of Financial Center, 9A Financial Street, Xicheng District, Beijing, P.R.China Zip:100033