弘毅投资-Hony Capital

The titans of the buyout industry have spoken: China is the next market.During the past few months, the Asian private equity industry witnessed a flurry of activity undertaken by global buyout houses to bolster their Greater China resources. Both Bain Capital and Kohlberg, Kravis Roberts & Co. have made
China. Despite the sheer size of the China market, buyout deals have largely evaded the preying net of hungry investors. In the 26 months ending February 2006, China boasted an US$8 billion aggregate of transactions, with companies that were prepared to grant investors the privilege to control their business accounting for only 11.4%, at US$914 million (fig.1).
In mid-February, China’s first known buyout fund management firm, Legend Hony Capital Ltd. (‘Hony Capital’), a wholly-owned subsidiary of Legend Holdings (‘Legend’) achieved a new milestone for China buyouts by executing a landmark transaction. It was the most extensive structural overhaul of a group of state-owned enterprises. Through a series of ac-quisitions via its Hong Kong-listed China Glass Holdings (‘China Glass’), Hony Capital is now in control of no less than 70% of the China glass market. It is a buyout that was consummated through careful planning over a 2-year time period, supported by an unrivalled network of con-nections and with precision timing.
The Legend Began
China Glass came to Hony Capital through its parent company, Legend, China’s undisputed leader in the information technology domain. In December 2003, the glass assets held by the Jiangsu Province Suqian City State-Owned Assets Bureau was sold to two groups of investors, Easylead Management Ltd. (‘EML’) and Right Lane Ltd. (‘RLL’) for 6.5 million yuan (US$786.26 million). Although Legend, through RLL, officially held a 40% stake in Suquian SAMC, the holding company of Jiangsu Glass Group (‘Jiangsu Glass’), it was in effect the controlling shareholder. At the time of the transaction, two of the three shareholders in EML held or previously held senior offices in Legend. Mr Cao Zhijiang was vice president in Legend, while Mr Liu also held the same position until his retirement in 2001. The third shareholder, Mr. Zhang Zuxing, was also a director in RLL (fig.2).
Following the transfer of shares, Suqian SAMC held a 63.35% interest in Jiangsu Glass with two state-owned asset management companies taking up the residual percentage. Huarong Asset Management held 33.10% while Xinda Asset Management held 3.52%. When China Glass made its debut in mid 2005 on the Hong Kong Stock Exchange (‘HKSE’), Legend set the scene for future buyouts. Its ultimate ownership of the assets of Jiangsu Glass was held through Hony International, assuming a 62.56% equity position. At the same time, a powerful strategic player also came onto the scene. Pilkington Italy, the glass making company, took up a 9.9% shareholding position in China Glass' initial public offer.
The Quoted Legend
At the time when China Glass became a listed company, it had a daily melting capacity of approximately 900 tons. At the end of December 2004, six months before it was listed on HKSE, the company’s revenue stood at 429.74 million yuan and boasted a gross profit of 126.27 million yuan. But within three months, Mr John Zhao, chairman of China Glass and a board member of Legend, as well as the managing director of Hony Capital, released China Glass' disappointing results. In the first half of 2005, although China Glass' exports tripled to 71.01 million yuan, the glass making company’s turnover fell by 5.77% to 193.36 million yuan while its net profit margin also plunged to 16.02 million yuan, a57% drop compared to the same period in the preceding year. Mr Zhao cited soaring high oil prices as the prime factor for the plunging net profit. Yet China Glass saw that this was also an opportunity to take control of the country’s glass industry which was in over supply. At the same time, Beijing was in favour of a consolidation of the industry. At a public meeting in September last year, Mr Zhao hinted that China Glass intended to strengthen its position through mergers and acquisitions. His prediction came true in February this year.
The Growing Legend
In mid February, China Glass announced the acquisition of seven companies through an investment vehicle, JV Investments, representing a deployment of 320.8 million yuan for the entire transaction. China Glass will assume a 48.06% equity position, Legend, through its 100%-owned subsidiary Mei Long, had secured an 18.51% slice, while that for Pilkington Italy was 7.32%. The remaining 26.11% has been allotted to GYY Vendors. According to public documents, GYY Vendors are “18 natural persons” who are citizens of the Peoples’ Republic of China. Upon completion of this transaction, Legend, through China Glass and Mei Long, remains the commander-in-chief of the assets held by China Glass. The transaction provides Pilkington Italy the option to increase its holdings through the exercise of convertible bonds. In the event this comes about, China Glass and Mei Long will continue to be in solid control of JV Investments, as the two parties will jointly hold 48.48%. In this 320.8 million yuan transaction, China Glass accounts for 158.4 million yuan. In reality, the equity sum for China Glass was only 80 million yuan while the residual 78.4 million yuan will be bank loans. With 49.49% of the commitment sum being provided by the bank as the leverage for this buyout deal, it is an expression of the level of confidence of financers in backing such kind of transactions in China. It is also an indication that buyout transactions in China will find leverage providers (fig.3).

To China Glass, the 80 million yuan equity commitment will not only immediately elevate it to become the largest glass making company quoted on the HKSE, but will firmly consolidate its paramount position in China’s glass industry. As a result of the acquisitions of these seven enterprises, China Glass’daily melting capacity will reach no less than 3,450 tons, compared to the previous 900 tons at the time when it made its initial public offering. The newly-ac-quired assets have also immediately bolstered China Glass’turnover by an additional 1.54 billion yuan and a net profit of 40.56 million yuan.
Observation
It took Legend and its buyout unit, Hony Capital, more than two years before it was able to execute this recent landmark buyout. Prior to this major move was the restructuring of Jiangsu Glass’assets, an overhaul of the share-holder structure as well as the ultimate debut of China Glass on the HKSE. Even after having acquired the seven companies, China Glass issued a warning that its profit for 2005 would record a substantial decrease due to lethargic growth in China’s glass industry. It has been a lengthy journey for Legend to take control of China’s glass assets. Hopefully, profitability will soon arrive to embellish China Glass’balance sheets following its recent acquisitions.