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Foreign Investment

in China:
The Private Equity
Perspective

X.D. Yang
Managing Director
Carlyle Shanghai
Office
Favorite Destination
Fasting Growing & 2nd Largest Market
in Asia FDI into China
($ Bn)

49.3 53.5 48.7


40.4 40.8 46.8

1999 2000 2001 2002 2003 3Q2004

Private Equity Investment in China Private Equity Investment Ranking


($ mm) ($ mm)

8,856
1,282
992
518 418
1,282 1,185 1,015 584 507
2001 2002 2003 3Q2004 J apan China Korea Australia Malaysia I ndia
Favorable Trends for Private
Equity Investing
 Attractive macro-economic growth story
 Structural changes - WTO
 Privatization of SOEs
 Private sector growth
 Large technology based talent pool
 More reasonable valuation
 Exits become easier
Trends:
SOE Privatization Prompts Change in
Ownership
Total number of Gross industrial output value of
State Owned Enterprises SOE to total
(SOE) in China = 340,000 Percent

52
47
37 34 36 32
28 28 27 26 24

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002
SOEs to be kept – less than
200
SOEs to be privatized

Source: China Statistics Year Book


Trends:
Growing Engineer Pool Fosters VC
Talents
90 1600
Engineering Post Graduates (LHA)
80 1400
70 Engineering College Graduates (RHA)
1200
60
1000
(thousands)

50
800
40

(thousands)
600
30
400
20
10 200

0 0
1975

1978

1981

1984

1987

1990

1993

1996

1999

2002
Source: CEIC, Morgan Stanley Research
Trends:
Valuation Has Come Down

S h a n g h a i A-S h a re s In d e x P /E

70

60

50
(x )
40

30

20
J a n-0 1 J ul-0 1 J a n-0 2 J ul-0 2 J a n-0 3 J ul-0 3 J a n-0 4 J ul-0 4

Source: Bloomberg
Still…Challenges Like No Other
Markets
 Limited exit channel
 Lengthy deal execution process
 Difficult to gain control
 Volatile industry dynamics with
irrational competitors in SOEs
 Lack of management talent pool
 Unpredictable regulatory and legal
environment
Carlyle’s Investments
Three Roads to China
Buyout Venture

Leading online travel


$35 mm information and reservation
services company in China.
World’s largest supplier of artificial Christmas
trees.
Leading Lithium-ion polymer
$45 mm batteries maker in China.

A chain of nine department stores in China. Leading


Chinese Leading Chinese Media
company with focuses on
Leading Media delivering advertisements
Chinese Compan through traditional and non-
$400+ mm* y traditional media.
Insurance
Provider Real Estate
Leading
Chinese
• Investments range $10-50
Construction $300+ mm*
Equipment mm
Manufacturer • Commercial and Residential
* Transactions in progress