June at the Hong Kong Stock Exchange was called "China Month" – three large China-invested companies including Shenhua Group, China Communications Bank and Cosco Holdings held IPOs one after another, raising a total of nearly HK$ 50 billion (US$ 6.5 billion). Comparatively, China Glass Holdings (China Glass), which raised only HK$ 180 million (US$ 23 million) at its IPO, had a much more subdued listing.

What really attracted attention was China Glass's Legend-link background. Interestingly, Liu Chuanzhi, who retired from the post of chairman at Lenovo Limited (HK:0992) in early June, reappeared publicly as President of Legend Holdings Ltd. at the China Glass listing ceremony.

Standing shoulder to shoulder with Ying was none other than Legend lieutenant and China Glass CEO, 42 year-old John Zhao. Low-key from start to finish, this overseas returnee or "haigui" is the captain of Legend Holdings' newest warship—Beijing Hony Capital Ltd.

Hony Capital's rise to the top has finally begun to have an impact after Legend Holdings spent more than four years of meticulous planning to enter the buyout capital industry.

Hony makes a move
The first time Hony Capital was mentioned publicly was at the Legend 20-year anniversary ceremony in December 2004, but the company only began to attract attention in April 2005 after Legend's official involvement in the restructuring of Jinan Auto-Accessory Workswas disclosed. It was Legend Holdings' second attempt at entering traditional industries since testing the waters of China's real estate sector by forming Raycom Real Estate Development.

From an outside perspective, forming Hony Capital was clearly an unusual undertaking for Legend Holdings. For example, Human resources planning is quite different between Hony Capital and Legend Holdings' other business units: Lenovo, Digital China, Legend Capital, and Raycom—not only is Hony Capital president John Zhao not an internal hire, he is a typical "Haigui."

John Zhao went to study in the U.S. in 1987 and received an MBA from the Kellogg School of Management at NorthwesternUniversity.

And that's not all. Hony Capital's main contingent of 29 employees is pure "Haigui". This carefully constructed "overseas regiment" is Legend Holdings' first specialized buyout capital unit.

Legend Holdings officially kicked off a buyout capital project in January 2003 by opening an internal investment operations division. A year later in April 2004, Hony Capital was officially introduced. Hony operates in line with standard international fund management procedures and currently manages two investment funds containing combined capital of over 1 billion yuan (US$ 121 million).

According to sources, investment in the first fund came entirely from Legend Holdings. Investors in the second fund, aside from founder Legend Holdings, include U.S.-based Goldman Sachs, Hong Kong-based Sun Hung Kai Group, Singapore-based Temasek Group, Enspire Group and additional smaller international investors.

In fact, global buyout funds have been developing rapidly in recent years. According to Bank of Japan statistics, from the early 1990s until the present, the total number of buyout funds worldwide has increased by fivefold. These funds frequently focus on completely revamping the management and operations of recently acquired corporations and don't stop after simply refinancing debt structures. In the past 20 years, the average rate of return for buyout funds has surpassed the S&P 500 index by four percentage points. European and Japanese experience dictates that buyout funds have been able to bring about win-win situations for both investors and acquired corporations.

The systematic reform of state-owned enterprises and industry restructuring going on in China at present will undoubtedly create a wave of buyouts. According to John Zhao, this is undoubtedly a "historic and systematic opportunity." So far, Hony Capital, which was founded only a year ago, has already invested in five companies.

In December 2003, Legend Holdings acquired China Glass from the Jiangsu Province Suqian City State Owned Assets Bureau through its wholly owned subsidiary Hony Capital. A little over a year later, after going through a systematic restructuring and capital registration as well as a series of other procedures, the new Bermuda-registered China Glass made a smooth entrance into the capital markets. The final offering price was HK$2.18 per share, quite close to the upper limit of its target price range. Its shares were oversubscribed by eight times on the Hong Kong exchange.

According to sources, Legend Holdings spent 80 million yuan (US$ 9.7 million) to acquire China Glass. After its listing, Hony Capital maintained a 25 percent stake in the company, which at current market prices is worth more than HK$ 190 million (US$ 24.5 million).

China Glass was clearly a good early performance for Hony Capital.

Key Links to Real Estate
Following its debut in the buyout fund industry, Legend Holdings is coming to terms with its new role. "In the past [at Lenovo], I was extremely confident in our ability to successfully build a lasting corporation, but now as a shareholder I feel like a few bumps in the road are inevitable," said President Liu Chuanzhi.

At present, Legend Holdings owns a 43.2 percent share of Lenovo and half of Digital China shares. Although Legend Capital, Raycom and Hony Capital are each wholly owned by Legend Holdings, the companies still need time to develop. Currently, Legend Holdings receives the bulk of its profit from Lenovo and Digital China.

In 2003, on account of a few oversights in cellular handset sales and other markets, China Digital saw an overall loss for the year. The loss crystallized in Liu Chuanzhi's mind the fragility of Legend Holdings' profit structure. From Liu's perspective, despite China Digital maintaining an upper hand in the IT sales sector, there were going to have to be some major changes made in the next two to three years.

After shelling out the cash to acquire IBM's personal computer business, Lenovo began the lengthy integration process. Subsequently, Liu Chuanzhi told Caijing with confidence that even in the worst-case scenario, Lenovo would not face cash flow problems.

Liu had great expectations for the IBM acquisition. From his perspective, the deal would bring a new level of quality to Lenovo, but in order to realize the benefits it would require a lot of time and patience and Lenovo CEO Yang Yuanqing would need more room to maneuver. They might even need to sacrifice a few short-term profit goals.

But pressure from the shareholders to meet investment return rates didn't relax. As a figurehead company for the ChineseAcademy of Sciences, Legend Holdings was juggling too many internal and external projects, each with its own investment returns that needed support. Liu Chuanzhi and Legend Holdings were left scrambling to find ways to boost profits.

After going through an initial rocky period following the acquisition, Legend Capital's current situation is comparatively smooth. Legend Capital has fully utilized the US$ 35 million invested in its first investment fund. The capital was invested in 16 enterprises, three of which it successfully existed and three of which it completely liquidated. Legend Capital originally invested a total of US$ 6 million in the three companies from which it successfully exited and they returned close to US$ 35 million combined.

The second investment fund contained a total of US$ 70 million. Legend Capital held a 60 percent equity share, with the additional 40 percent held by overseas investors. Liu Chuanzhi pointed out that up to the present, the investment return rate of the second fund had shown even more promising results than the first fund.

Nonetheless, the hopes of spreading out the risk from the IT sector are now more than ever resting on Raycom.

In 2001, after Lenovo and Digital China split, Legend Holdings decided to make a foray into real estate. Raycom has property reserves of over two million square meters in Beijing, Tianjin, Chongqing, Changsha, Wuhan and other cities. In 2005, total area under construction reached more than 300,000 square meters. Among that was the Raycom-invested and designed Raycom Infotech Park located in the north of Beijing near the fourth ring road, which had a tenancy rate above 98 percent.

"We absolutely will not engage in property speculation or do deals with the government behind closed doors. As long as we can get a rate of return between 10 and 20 percent, we can create a foundation for ourselves through timely operation and large scale," Liu Chuanzhi emphasized to Caijing.

Liu Chuanzhi speaks prudently about the financial markets. At the present, Legend Holdings owns a 25 percent share of Beijing Gaohua Securities Ltd. Under current plans, Gaohua Securities will form a joint venture with internationally renowned investment bank Goldman Sachs.

Gaohua Securities is a special case for Legend Holdings, Liu Chuanzhi said. Due to a lack of deep understanding of the securities business, Legend Holdings has no plans to invest in additional financial enterprises in the short term. But Liu Chuanzhi did admit that future investments in the financial sector will be made through Hongyi Investment.

In the last several years, Legend's numerous acquisitions and joint ventures in the IT sector haven't come up with the returns they initially hoped. Currently, Legend Holdings is facing similar experiences in the development of its non-IT investments. Liu Chuanzhi admitted that the current situation is in fact the result of a continuous process of trial and error.

In May 2001, Legend Holdings founded the Beijing Jin Bailing Food Service Limited (www.jinbailing.com.cn) on the foundation of the Legend employee cafeteria. In June 2003, Legend Holdings formed APLL-Zhiqin Technology Logistics (www.zhiqin.com.cn), a joint venture with Singapore-based Neptune Orient Lines subsidiary APL Logistics Limited. Initially expected to become integral parts in Legend Holdings' future structure, both quietly drifted out of the limelight.

Liu Chuanzhi believes that there will always be some room for course corrections in Legend Holdings' future strategy. As for Lenovo and other companies Legend has already invested in, when the time is right, there is always the possibility that Legend Holdings could make further acquisitions for the long run.

In Liu's mind, this is what the next five years has in store for Legend Holdings: Lenovo and China Digital will maintain their strong positions in the IT sector while Legend Capital and Hongyi Investment will become leaders in the buyout industry. Raycom will take up an increasingly important role in supporting Legend Holdings whether it is through total assets or through rate of return on investment.

For Legend Holdings, "the future is wide open," said Liu Chuanzhi.