Two Videos on Private Equity

World Economic Forum Davos: The Globalization of Private Equity


Berkeley China Initiative: Private Equity in China

Even Central Americans Want to Learn Mandarin

I previously blogged about the increasing importance of the Mandarin language, due to China's economic ascension. Now, even the people of Panama are considering making it compulsory for their children to learn Mandarin as a 3rd language.

Mandatory Mandarin lessons for Panama kids?

PANAMA CITY - LEARNING Mandarin could soon be compulsory for schoolchildren in Panama, in a bid to prepare the Spanish-speaking nation for China's growing importance as a trading partner.

Panama's National Assembly will next week debate a Bill to make Mandarin lessons obligatory in all government-run primary schools in the trade-dependent nation.

Mandarin is the official language of both China and Taiwan, and though Panama has no diplomatic relations with Beijing, China has major interests in its transport and shipping sectors.

Congressman Arturo Arauz, who drafted the proposal, said it would help prepare Panama for a 'new linguistic order' prompted by spectacular economic growth in China.

'We cannot ignore that a lot of our trade is with Asia,' he said. 'In 20 years' time, the world is going to be a very different place.'

Under the proposal, children aged between six and 11 would learn Mandarin for a trial period of 10 years.

English would continue to be taught in schools as a second language.

REUTERS

If you are Singaporean Chinese and you don't speak fluent Mandarin, you better start working on it!

RH Energy

BUSINESS OVERVIEW

RH Energy (RHE) offers a full suite of integrated customised design, engineering, procurement, construction, installation and commissioning services (EPCIC) to the oil and gas pipeline and storage operators and oil companies. Currently, RHE’s main business focus is to fabricate and install equipment and systems which form an integral component of a gas or oil pipeline in the PRC. RHE uses products from reliable and reputable international principals such as Cameron, Goodwin, Siemens and Ruhrpumpen, in order to meet the stringent requirements of RHE’s customers.

Within the PRC, pipelines are used to transport crude oil from the oil fields to the oil refineries for processing. After which, the refined oil is then supplied to the various towns and cities in the PRC via pipelines. Similar method is adopted to transport natural gas to the various towns and cities in the PRC. Pipeline is an economical, efficient (with minimum product loss during transfer) and safe method to transport the oil or gas produced from the oil or gas field to the refinery, and for distribution of the refined product or town gas from refinery and petrochemical plant to consumers. It is one of the main infrastructures that oil companies rely on for product transportation to reduce hazard, improve efficiency and maximise profit. This business connects RHE with both the upstream and downstream players in the oil and gas sector, hence providing RHE with a platform to expand its customer base.

The upstream activities cover exploration and production of oil and gas while the downstream activities include the transportation of oil and gas to the refineries, oil and gas refining activities, storage facilities and managing the distribution and marketing of the refined products to users. Having constant contact with companies involving in the upstream activities increases our chances of receiving more tender invitations and customers’ enquires. On the other hand, RHE also receives jobs referrals from companies engaging in the downstream activities who are satisfied with our products and services.

RHE’s principal activities can be broadly classified as follows:

(a) Equipment integration services – These services include (i) the engineering, procurement, fabrication, installation and commissioning of emergency shut down valve system, directional flow control valve system and flow control valve system; (ii) the design, engineering, procurement, fabrication, installation and commissioning of CNG pressure regulating system, custody transfer metering system and online natural gas analyser system; and (iii) the engineering, fabrication, installation and commissioning of pump and electromotor system;

(b) Manufacture and procurement services – These services comprise the manufacture of coating products (liquid form). The main function of coating products is to protect against corrosion of the surface of oil and gas pipelines and storage tanks, and other industrial metal surface. In addition, at the request of RHE’s customers, RHE may also assist them in sourcing and procuring the requisite equipment and spare parts for their use; and

(c) Consultancy services – RHE provides consultancy services to its principals and suppliers such as Cameron, Siemens International Trading Ltd, Ruhrpumpen, Flowserve Pumps and Emerson. Such consultancy services may include technical advice, on-site installation and commissioning works, and after-sale services.

RHE’s major customers are mainly from or affiliated to the three PRC major oil companies, namely the PetroChina Group, Sinopec Group and CNOOC Group.



(click for full images)






COMPETITION

RHE operates in a competitive industry. RHE’s competitors are companies who manufacture and/or supply equipment and systems to the oil and gas industry in the PRC. RHE competes based on pricing, product and service quality, reliability and durability of our products as well as technical competence.

The following are RHE’s main competitors:
• Best Petroleum & Natural Gas Equipment Co., Ltd , a PRC company who is principally engaged in providing equipment integration services for oil and gas projects.
• Sulzer Pumps (China) Limited is an entity of Sulzer Pumps Ltd, a company based in Switzerland. Sulzer Pumps Ltd develops and supplies centrifugal pumps and operates a network of service centres, offering maintenance, repair, spare parts and upgrading services for pumps.
• Schuck Armaturen, a company based in Germany that supplies pipeline and valves.

INDUSTRY PROSPECTS

Growing Oil Demand in the PRC
The demand for oil in the PRC has grown rapidly over the past decade driven by sustainable strong economic growth. Given the strong economic growth in the PRC over the past years, demand for oil has soared. The PRC is now one of the largest oil consuming countries in the world.

Demand and consumption of oil in the PRC is expected to increase in the future, driven by the expected continuing economic growth, industrialisation, urbanisation and growing affluence of the population. It is generally expected that in the next ten years, the daily demand for oil in the PRC will double its present demand and by 2020, more than half of the PRC’s oil demand will have to be met through imports from overseas.

For the above reasons, the PRC is putting together a comprehensive plan to include the carrying out of more oil exploration, development and production activities in the PRC, setting up of strategic oil reserves, acquisition of overseas oil resources, and the building of a country-wide oil and gas pipeline network. Our Directors believe that, in view of our Group’s competitive strengths, these initiatives will result in an increase in demand for our services and products.

Development of Natural Gas Market in the PRC
In light of the committed effort of the PRC Government to ensure more efficient use of energy and to identify alternative energy sources, the PRC Government has taken initiatives to promote the wider use of natural gas as an alternative form of energy, and its usage in the industrial and power generation, residential and transportation sectors, is expected to grow.

The PRC Government’s initiatives to promote the use of natural gas in the PRC have resulted in rising expenditures in the gas equipment market over the last few years. The substantial investments made by the PRC Government in respect of the construction of gas pipelines and LNG import terminals and port infrastructure are poised to have a significant impact on the supply and thus the widespread usage of natural gas in regions where such source of energy was generally unavailable before.

FINANCIALS

The following is some information that helps in making forecasts and estimates for RH Energy

Segment Information

Profit Margins (from HY07 report)

Order Book - HY07 Announcement
Order Book - End Aug Announcement

Based on the above announcements i have forecast 7.6m revenues in 2H07 and the remaining outstanding contracts as revenue in FY08. Naturally we expect RH to secure more contracts going forward so the forecast for FY08 will be conservative.

As for profit margins I have taken the average of FY04, 05 and 06. The margins in 06 appear to be anomalously high with some high margin contracts secured. With increasing competition and a different contract mix, margins are expected to drop drastically from FY06 to a more normalised level.
At the current market valuation of $0.70, RH Energy is very aggressive valued. It seems that the market is expecting the company to secure many more contracts going forward and/or secure contracts with high margins. This is a very optimistic scenario for the company because even though the oil extraction/transportation market is robust, RHE's industry is competitive and this is expected to have a negative pressure on margins.

It is interesting to note that market price of $0.70 is more than twice the IPO pricing of $0.32 earlier this year.

At the moment, the market appears to have very aggressive expectations for the 'China' and the 'Oil' stories to have a drastic positive impact on RHE's income statement; this stock is definitely not for the conservative investor.

China Oilfield Technology: IPO Summary and Valuation

China Oilfield Technology (COT) is an IPO in process.

Business

COT provides customised technical solutions for Its customers, incorporating its proprietary technology and techniques in tertiary oil recovery to enhance the extraction of oil. COT is principally engaged in the research, development, manufacture and sales of customised integrated equipment and products, which are used during chemical flooding and during treatment of resultant residual liquids. In addition, COT provides energy saving and other equipment. Its customers are mainly located in the PRC.

COT’s production and research facilities are located in the Hi-Tech Development Zone, Daqing City, Heilongjiang Province, PRC. COT also has research and development facilities in Beijing.

COT’s products can be categorised under the following segments:-

I. Enhanced Oil Recovery
a) Polymer injection equipment
b) ASP injection equipment
II. Environmental Protection
a) ASP residual liquid treatment system
b) Mobile underground water treatment equipment
III. Energy Saving and Others
a) Integrated electrical control station
b) Energy saving equipment for oil pumping units
c) Customised pumps and parts

COT’s direct materials comprise mainly steel plates, steel pipes, pumps, valves, electrical components, meters and spare parts. Some of these components are manufactured in-house, while others are outsourced to third party manufacturers who will produce these components according to COT’s specifications. The various components are fabricated in our Daqing production facility and assembled in accordance with COT’s blueprints and later delivered to the site where they are to be installed. Installation is performed by independent contractors hired by COT's customers and supported on-site during installation by COT’s customer support staff.

Most of COT’s products are sold to customers in the upstream oil industry. COT’s major customers comprise mainly operating units of Daqing Oilfield Co., Ltd., a wholly-owned subsidiary of PetroChina. COT’s production facilities are located in Daqing while our research and development activities are conducted primarily in Beijing.

The revenue breakdown above shows that COT’s business overwhelmingly comes from oil recovery services.

Competition

China Oilfield operates in a competitive environment where players in its industry generally compete by providing integrated tertiary oil recovery equipment and technical services to adequately address the needs of PRC’s oil extraction companies. The barrier to entry is relatively high due to high research and development cost, extensive oilfield experience and technological know-how required for the business. As such, there are only a limited number of companies providing integrated tertiary oil recovery equipment and technical services. China Oilfield’s main competitors are:-
(i) for Polymer Injection Equipment, Daqing Long Di Petrochemical Technology Co., Ltd; and
(ii) for ASP Injection Equipment, Daqing City Pu Luo Petroleum Technology Co., Ltd
.
Industry

Increasing demand for tertiary oil recovery technology and equipment in the PRC
• The PRC is one of the largest oil producing countries in the world, but is a net importer of oil because of continued growth in consumption as a result of strong economic growth
• Prolonged use of water injection as a means of secondary oil recovery technique has caused a slowdown in extraction efficiency in some of the major PRC oilfields

Favourable development trend for tertiary oil recovery technology
• Daqing Oilfield Co., Ltd. plans to extend the use of tertiary oil recovery technique in more than 80% of its oil extraction sites in Daqing oilfield in the next 15 to 20 years
• By the end of 2006, tertiary oil recovery in Daqing oilfield had reached an output of more than 10 million tonnes per year, accounting for approximately a quarter of the total crude oil output in Daqing oilfield
• Other PRC oilfields, such as Shengli, Changqing and Xinjiang, have gradually expanded the scale of their tertiary oil recovery processes as their oilfields approach maturity
• Leveraging on Daqing oilfield’s established record in tertiary oil recovery, COT believes it can further enhance its credibility and reputation in the industry to attract potential domestic and overseas customers

Notes

China Oilfield has a long accounts receivable period of 225 days, but this is matched by an accounts payable of about 200 days.

Financials

A simple extrapolation of FP2007’s performance to FY2007 gives an EPS of RMB 22.62 cents (=2.89/2.08 * 16.28), based on a 15% revenue growth rate and a 39% increase in earnings. It appears that China Oilfield is going through the economies of scale stage where operating leverage increases and profitability per marginal revenue dollar increases.

At 31 May 2007 China Oilfield has net assets of 261044 on 396571 of total assets for a debt/assets ratio of 34.17%.

Rough Valuation

The projected EPS of FY2007 pre-IPO is RMB 22.62 cents = 4.5 sg cents. At the IPO price of $0.60 this gives the pricing a forward pre-IPO P/E of 13.3.

The NAV per share pre-IPO at 31 May 2007 is $0.43 RMB. The $3 RMB offering price is a P/B of 7x. Post offering this translates into a P/B valuation of 300/91 = 3.3.

Post IPO the market cap of the company is RMB$3 * 728595000 = RMB $2185785000. This gives a projected forward P/E of $2185785000/$135935596 = 16.08.

This is not necessarily a cheap valuation, but that should be weighed against the strong growth prospects of the tertiary oil extraction industry in China, and COT's competitive positioning in this industry.

Air China may block SIA’s China Eastern purchase

The following describes what may be a competitive counter-move by Cathay Pacific & Air China to thwart SIA's ambitions to expand in the PRC. This is a particularly interesting story because it highlights an explicit move by an international competitor to engage one of Singapore's major GLCs in head-on competition over one of the major airline assets in China, and more importantly for market share in the world's fastest growing airline market.

If the rumours are true that Cathay & Air China are trying to block SIA's acquisition, then it will be interesting to see how Singapore's flagship airline reacts. And it will also be instructive to note that while SIA has a free, dominant reign at home, it receives absolutely no red carpet treatment once it ventures beyond the political influence of the PAP.

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Air China may block SIA’s China Eastern purchase

The South China Morning Post reported on Saturday that Air China (753 HK, HK$11.84, NR) has accumulated an 11% stake in China Eastern’s H-shares (670 HK, HK$9.72, NR), from a mere 5% five months ago. Meanwhile, shares of Cathay Pacific (293 HK, NR) rose 10.7% on Friday to a record HK$22.70 before trading was suspended pending an announcement of a price-sensitive proposed transaction. Shares of Air China, China Eastern and China Southern (1055 HK, HK$13.90, NR) also rose.

While there is no official explanation from Air China on the nature of its share purchases in China Eastern, there is growing market talk that Air China and Cathay Pacific, both linked by a 17.5% cross-shareholding in each other, are uniting to block the SIA-Temasek joint bid for a 24% stake in China Eastern. This latest twist came as a surprise. If SIA is thwarted in its China ambitions, it may release cash to shareholders through special dividends, which will be positive for the share price in the near term.

The Air China-Cathay Pacific alliance is probably trying to fend off a potentially strong competitor from emerging in its own backyard. The deal, which will see SIA buy a 15.7% stake for HK$3.80 per H-share and Temasek buy an 8.3% stake, will require the approval of two-thirds of existing minority shareholders.

...
Impact on long-term growth. If SIA is thwarted, it may be prevented from developing its base in one of the world’s fastest-growing aviation markets, and this could negative implications for its long-term growth. SIA could also be more vulnerable to competition from Middle Eastern carriers on the lucrative kangaroo route as more capacity is deployed. However, SIA may still consider purchasing stakes in smaller privatelyowned airlines in China, and build the business slowly. We believe this is not its preferred strategy.

Read the rest of the CIMB research note here

The Importance of Learning Mandarin in Singapore: An Economic Perspective

When I was younger, I did rather poorly in my Mandarin classes in school. I got a D7 for my Chinese at AO-level in my first year in junior college. In the second year, I gave up trying to pass the subject and dropped it. I just could not see the relevance of putting effort into learning a language which I did not use at home, in my other subjects, or in any practical way other than in Mandarin language class. In short, I was studying Mandarin in a vacuum.

Nowadays, I know that some students in Singapore schools face a similar difficulty and lack of motivation towards putting their hearts into learning the language. For many years the education system has been constructed primarily around getting grades rather than learning for learning's sake. It is thus understandable that students might be unmotivated when learning the subject; it is extremely difficult to study Chinese just for the sake of passing exams.

The thing about learning a language is that a language never exists in a vacuum. It is a medium of communication, a tool used by people to exchange ideas, to record thoughts and knowledge, and to express oneself. It is thus natural that without an environment within which to regularly use the language, or without a purpose which includes learning Mandarin as a part, students are naturally unmotivated to study the language at school.

Personally, I have since moved on from those times when I was unmotivated to learn the language. My experience studying in Australia and my deepening understanding of global economics and business have given me a personal impetus to improve my Mandarin.

Here are examples of the things I have seen:

A. China's economy is large (3rd largest) and is the fastest growing of any of the major economies in the world. In time to come, it will exert an global economic influence that businesses, politicans and employees cannot ignore. Indeed, the global economic center of gravity has begun to shift across the Pacific Ocean away from the USA. Those with a grasp of the Chinese language will be in an advantageous position to benefit from the ascension of the Chinese economy.

As a case in point, let us take the economy of Australia. Australia is one of the most resilient economies in the world. It has shown positive or flat economic growth for the last 15 consecutive years. In most of those 15 years, Australia's economy experienced expansion, and it is still going strong. This is unprecedented for a developed economy. A deeper examination into the roots of Australia's economic growth will reveal that it has been driven by the global natural resources boom of which China has been the engine. As a country rich in natural resources, Australia has seen a surge in natural resource exports to China, and this has had a persistent multiplier effect throughout the Aussie economy. Needless to say, the Australians who have some sort of understanding of Mandarin have been able to capitalise on the business opportunities presented by China's insatiable thirst for natural resources.

B. Not too long ago, a certain individual was passed over for the top job at Goldman Sachs China because his mandarin was not good enough:

"Goldman's Ong misses China CEO job on language hitch (Bloomberg)
Updated: 2007-07-12 16:33

Goldman Sachs Group Inc, the world's most profitable investment bank, couldn't name the co-head of investment banking in Asia as chief executive officer of its Beijing joint venture because his knowledge of Chinese was too weak, three bankers at the firm said.

Richard Ong, an ethnic Chinese born in Malaysia, didn't write Chinese well enough to take a mandatory test for senior managers, said the bankers, declining to be identified as the matter is private. New York-based Goldman instead promoted Zha Xiangyang, deputy CEO of its China joint venture, Goldman Sachs Gao Hua Securities Co, in May."

See here for the entire article.

Indeed, it is no trivial matter that a senior banker at one of the world's top banks was unable to land the top job in the world's fastest growing securities market. A firm grasp of the Chinese language is so critical to doing business in the country that even those with less experience and ability may be promoted to top positions over those who are technically more capable but linguistically less so.

C. For many years, Las Vegas has taken pride in being the gaming and entertainment capital of the world. Yet since the liberalisation of the gaming market in Macau not too long ago, Las Vegas has already been supplanted from its perch by the former portuguese economy. Macau in 2006 over took Las Vegas in gaming revenues; in time to come it will far and away outstrip Las Vegas and make it look like a small fish. All the big players in the gaming market, including Americans, Australians and Europeans have been rushing to get a foothold in Macau market.

Read this to get a sense of the scale of the Chinese market.

D. In the world of entertainment, we are seeing a conscious decision on the parts of movie executives to try to penetrate the Chinese market. Pirates of the Caribbean 3, for instance, starred Chow Yun Fatt and a few other Chinese actors. Oceans 13, for the first time, included a Chinese actor in its cast, who only spoke Mandarin throughout the movie. In short, Hollywood is beginning to realise that the Chinese market is just too large to ignore.

E. Closer to home in Singapore, the government has made a push to expand industries such as the integrated resorts, private banking, and digital media. I have absolutely no doubt that the Chinese market will be a major contributing factor to the growth of these industries in Singapore. Those seeking for jobs in these areas will definitely have an advantage over their peers if they are fluent in Mandarin.

Conclusion

As we can see, China will exert its influence far and wide on the global economy in almost every field of business and in every part of the world, particularly in Asia. These examples that I have listed are only the tip of the iceberg, a simple enquiry into the Chinese influence on the global economy will make its importance apparent. Ethnic Singaporean Chinese who ignore the Chinese language only do so to their personal disadvantage.

As for me, the difficulties of finding motivations to improve my Mandarin are long gone. I now try to watch Mandarin movies, interact with Chinese people, and put myself in situations where I can be exposed to the language. I hope that in time I will be able to have a fluent grasp of the language.

How about you?

Looking for Opportunities in China

The rapid growth of the Chinese economy has forced investors all around the world to pay attention to it, and there are very few businesses that have not been impacted by the awakening of the Dragon. Yet the opportunities that the Chinese market provides bring risks as well. Here are some things to look out for in a company that is competing in the Chinese market:

The Chinese market is huge, and so is competition. Companies which are unable to articulate a strong competitive advantage will find it difficult to survive the onslaught from counterfeiting, piracy, and sheer will of the Chinese themselves to compete away the profits of others. Any product or service which is not able to differentiate itself adequately will quickly become a commodity. As such, companies with established records in developed markets tend to have a greater chance of doing well in China. Their track records of success in developed economies such as USA, Hong Kong and Singapore show that they have quality managerial expertise, quality products, and/or an established brand name which are more likely to withstand the intense competition that they will face in China.

Examples that have succeeded include household brands like Mercedes Benz, Starbucks, McDonalds, Las Vegas Sands and OSIM. They all have established brands in developed economies and have proven business models. Conversely, a company which is simply banking on "the huge China market" and "immense opportunities for growth" and does not have a proven business model will find it difficult to survive in the ruthless environment that is characteristic of the Chinese market.

The Chinese economy also has problems with the enforcement of patents and intellectual property. Bill Gates should know: the vast majority of Microsoft software being used in China has not been paid for. Hence, business models which are not dependent on the existing legal framework to enforce property rights will have a better chance to succeed. Examples of sectors which fit into this category are, transport & logistics, natural resources, food & beverage, computer hardware (even this sector faces problems, though) etc. Examples of sectors which will face intense counterfeiting are digital media distribution companies like video, music, computer software etc. One example of a company that is able to circumnavigate the piracy problem is Blizzard (Vivendi Games) - its World of Warcraft game software is based on a subscription basis, which is not subject to piracy.

Another important point about investing in China is that the ability to compete on costs is not enough. Many manufacturing companies have relocated to China citing lower labour costs as their source of competitive advantage. This advantage may exist for a short while, but for most who entered the market on this premise, the cost advantage has disappeared. Intense competition has competed away this advantage; meanwhile, wage rates have begun their ascent. Municipal governments are starting to impose mandatory wage rises. And the businesses which only compete on costs have suffered as a result. An example of this is Creative Master. A company must not only be able to compete on cost, it must be able to compete based on quality and have other differentiating factors, so that it can establish some pricing power. Haier, for instance, has done so, and is now a global player in the white goods market.

In short, the sheer size of the Chinese market makes it a very tempting one to enter. But just being in the market is not enough. When researching a company, one should look for clues that indicate that it will be able to withstand the intense competition that it is bound to face. Only after establishing this should an investment be considered. Many have bePublishen burnt by the China story, and many will be in the future. Let's hope you're not one of them.