Case Analysis on Michael

Submitted by
SDMIMD, Mysore
FG 404

Introduction

Michael, leading private air-conditioning manufacturer.

Li Zhigao - Chairman of Michael.

Expansion plan to increase scale & stay viable in the competitive

market.

Edward Richmon, MD of Kyungsung, Hong Kong based investment bank

Michael needs to raise $400 Million for expansion.

Objective Worlds biggest air-conditioners manufacturer within the

next 5 years

Best funding source: loans, public offerings or Kyungungs client

investment?

Chinese Economy

In 1999, Chinas GDP ranked 7th in the world.

In 2004 and 2005, China recorded double-digit GDP growth.

Increased global economy integration due to WTO.

Personal savings of more than $1.8 trillion.

Total Domestic equity capitalization is around $640 billion.

Challenges in doing business are

corruption
inadequate infrastructure
limited access to financing

Stabilized Growth

Export & Domestic demand stabilized after rapid growth.

Average profit margin 5-10%.

Decrease in household air-conditioning brands from 150 to 69.

Fierce price wars- financially weak running out of market.

Economies of scale & enhancing production efficiency only option.

To achieve this companies needed heavy investments.

Valuing Expansion Plan

Export to over 20 Countries all collected in US dollars.

Only option to increase Michaels profit margin is to expand.

Inorganic growth of acquisition is not feasible

1. Not in same geographical region.
2. Technology is obsolete & increases production cost.

Investment Options
Equity Choices:

Hong Kong Stock exchange Regulatory benefits, property rights &

bankruptcy procedures.

Worlds 2nd largest stock issuance $2.95b by China Shenhua Energy.

NYSE & NASDAQ ADRs induce Americans to invest in Michael.

Market Capitalisation by Chinese companies in NASDAQ & NYSE

$3,623million & $27,295million respectively.

Investment Options
Private Placements:

Kyungsung successfully arranged private placements for its clients.

In 2005, size of private equity in China is $602 million

Estimated to double in 2008.

Debt Choices:

Foreign Banks 71 banks from 20 countries.

Relaxation of the foreign exchange control over the banks.

WTO obligations to open Chinas market to foreign banks.

Thank You