Opportunities for Private Equity Investment in China in 2010 in Consumer Retail sector

1. “China Private Equity 2010 and Beyond ..
Equity–
Consumer-Driven Investment Themes”
Driven
Jan 2010
GLOBAL CHINA CAPITAL
Shenzhen, China
Jan 2010 Version 3.0 by KC Yoon kcyoon07@gmail.com
PROPRIETARY & CONFIDENTIAL

2. Presentation Outline
China weathers crisis well and emerges
with stronger economic foundations
FOUR:
ONE: Strength TWO: Broad- THREE: Govt
Increased
in domestic based drive for focused on
market
consumption Domestic PE fundamentals
competition
Funds flow into domestic economic
sectors Maturing PE
Market
Government taking active role to
promote Private Equity investments
Other
Global Trends
Trends:
Key Consumer Trends and Potential impacting
PIPE/RMB
Investment Themes China
Fund
TWO: Internet – THREE: Changing
ONE: Domestic Brands
Changing the Traditional Lifestyle of Middle-class
Going Nation-wide
Business China
Jan 2010 Version 3.0 by KC Yoon

3. 2009 Recap: Macro-Factors Driving China’s Future Consumer Economy
Factors
Over 110 high-
consumer potential
cities with 34% of
3 GDP
IKEA continue to open 2
stores/year
By 2015, >300M
Demand for Housing
Housing- Sunning plans 500sqm
lower-middle related products and stores in the rural areas
class; 100M Growth of Chinese services targetting for 3000
luxury
consumers
Middle-Class
Preident 7-11 to open3-7
Demand for lifestyle &
stores in Shanghai plans
convenient services for 300 stores in 3yrs
> 200 Cities China Chain Nepstar
with >1M
residents
Urbanization and Demand for better drugstar opem/acquire 700
healthcare stores 2008, plans 3000
Growth of Cities
Sunning plans a B2C site
Growth of B2C
NOW >300M
users; >RMB
120B online
Growth and Impact Most widespread
Korea SKTelecom to invest
RMB500M in qingxuan its
consumer of the Internet media-
media access middle- B2C site
sales
class consumers
Letao to open largest
Jan 2010 Version 3.0 by KC Yoon Retailers online toy store in China
continue to
expand network

4. 2009 Recap: Key Consumer Trends with Investment Potential
Criteria for Strong
3 +
Investment
1 Potential
Affordable Luxury
for the Young Large Market
Growth of Chinese Affluent
Middle-Class “Mass Market” +
“Good Enough”
Products
High Growth
Urbanization and “City-Living”
Growth of Cities Consumer Services
Able to
Online Consumer
Sustain Good
Growth and Impact Brands
Margins
of the Internet
“Knowledge”
Services
Defensible
Govt Stimulus “Health”+ “Well- Niche
being” Services
+“GREEN”
- Increasingly
Jan 2010 Version 3.0 by KC Yoon important
Global trend

5. Recap 2009: Investment Ideas
Emerging “luxury” brands in jewellery,
Niche “Luxury” cosmetics & ladies accessories (
(eg.
Brands Unique hairpin retail combined with
strong service element)
Right Retail chains in 2nd/3rd tier cities
Strategy Chains in Inner
Retail
Cities
where growth potential is high and
= also target for M&A by larger players
Winning
Fund “Quick Fashion”- -Success of ZARA
Affordable “Luxury” + shows ready market for “affordable”
“Mass Market” luxury targetted at the mass market;
“Online ecommerce and other
Online
services will continue to grow as
Consumer/Ecommerce China becomes leading interent
Services nation”
Profitable and high growth segments
Education Services in K12, English Education & Adult
Education (IT& Vocational Training)
Jan 2010 Version 3.0 by KC Yoon

6. 2010 :Same 3 Core Drivers but with New Focal Points
3
potential cities with 34% of
Over 110 high-consumer
Growth of Chinese
GDP
Middle-Class
Broader
Consumer base
Urbanization and
Growth of Cities
2nd/3rd Tier
Cities New Growth
Internet+ Mobile Drives Brand
Areas
Accessibility + Reach
Growth and Impact
of the Internet
Mobile Drives
New Needs
Jan 2010
Version 3.0 by KC Yoon

7. Investment Theme 1 : Domestic Brands Going National -
Consolidation & M&A & Development of Market Leaders
Factors Supporting & Driving
Consolidation Sectors Impacted Market Activities Observed
FOREIGN INTEREST IN DOMESTIC MARKETS:
Convenience Retail, F&B services, FMCG products,
where foreign retailers bring edge in management Tsingtao acquisiition
know-how & technology or acquire domestic brand of Ji’an brewery to
Electronic Retail, Mobile Retail, Supermarket,
into portfolio consolidate
Right
Sportswear & apparel retail, Education
Shandong market
Strategy
FRAGMENTED MARKET SEGMENTS: where there
= are no clear market leaders with significant market
share
Winning
Fund
THIN MARGIN MARKET SEGMENTS: profit
margins are thin and economies of scale are critical
PE investment in mobile retailer FunTalk
to acquire 6 regional distributors to
become No.1 distributor/retailer of Mobile
phones in China before listing on
EXPAND RETAIL REACH: Strong brands targeting NASDAQ
to reach inner cities/grow from regional to national
network quickly
MULTI-BRAND/PRODUCT/SERVICE PORTFOLIO:
Decreasing growth rates from existing Listed Chinese Education service players
brands/products- need new revenue drivers have begun M&A (Chinacast acquisition
of 2 universities; Noah acquisition of
Little Star children education) in order to
develop national footprint & diversify
service lines
Jan 2010 Version 3.0 by KC Yoon

8. Investment Theme 1: Potential Investment Targets
Leading Niche Domestic Regional Retailers/ Services
Strong Brands with
Brands with Strengths in with Strong
nd /3 rd Tier Distribution Nationwide Potential currently
Growing 2
nd /3 rd Tier Markets limited by distribution reach
2 Network
Leading regional brands in Supermarkets in inner cities, Larger well-established brands or
cosmetics, personal care, Food & restaurant & food service chains, global brands that has potential to
drinks, fashion wear, etc etc be national market leader
• Dabao domestic personal care •Fujian-based supermarket retail chain • Burberry – franchised operations in
brand acquired by P&G for dominates 2nd/3rd tier cities and China acquired by parent brand
USD300M operates at higher
higher-then industry recognizing strong market potential
margins
• Regional fashion sportswear brand • Ladies shoe brand retailer with
• KungFu Catering invested by leading strong product but growth cpr to
VCs industry peers limited by lack of
expansion funds
Jan 2010 Version 3.0 by KC Yoon

9. Investment Theme 2 : Internet+ Technology Led Growth of New
Niches from Traditional
Factors Supporting & Driving Growth Sectors Impacted Market Activities Observed
INTERNET & TV DRIVES NEW CONSUMER RETAIL
CHANNEL : allows consumer access to new brands
& products+ brands nationwide reach
Right
Strategy TRANSACTION INFRASTRUCTURE:
Electronic Retail, Mobile, fashion
IMPROVING
internet B2C/;C2C services
(especially clothing) retail,
= efficient online payment systems + low cost
delivery drive transaction increase
Winning
Fund Explosive growth seen in online retail
especially clothing which by 2009 has captured
SHIFT IN VALUE PROPOSITION : may often result RMB2.4 billion or 9.7% of total clothing retail.
in creation of a new business service/model VANCL founded only in 2007 & invested by
leading VCs SAIF, IDG is the market leader with
24% market share
EXPAND BRAND REACH: extensive reach of
internet + mobile into young consumers help to
rapidly build brand awareness
IMPACT OF SOCIAL INTERNET : peer opinions on
brands, products, etc can influence consumer
behaviour
Jan 2010 Version 3.0 by KC Yoon

10. Investment Theme 2: Potential Investment Targets
Innovative new retail channels
leveraging new media New Business Models resulting from internet + mobile + other
(internet/mobile/digital TV)+ value proposition shifts
supporting infrastructure
• Mobile content download retail service as a result of
growth of mobile users and obstacle to access content
• Mobile
Propriety Customer
Mobile Content Interface + Attractive Operators/
Providers Retail Kiosks + Mobile
Sales of China’s TV Professional Service Retailers
Shopping will reach
Innovative Business Models
RM B 20billion in 2008
New retail channels with nationwide
reach at low cost
• Hunan TV & Taobao launching TV
•ALIMAMA is a micro-ad exchange & micro-retail
Home shopping channel to target
site targeted at consumers
lucrative & growing market
Jan 2010 Version 3.0 by KC Yoon

11. Investment Theme 3 : Changing Consumer Lifestyle of China’s
Urban Middle
Middle-class
Factors Supporting & Driving Growth Sectors Impacted Market Activities Observed
Education Services, Media & Entertainment, Travel
FOCUS ON HEALTHY LIFESTYLE: drives demand
Healthcare Devices + Services, Pharma Retail,
for healthcare products/services, sports services
Right
Strategy ON SELF-IMPROVEMENT & PERSONAL
FOCUS
Pearson acquisition of China’s WSI-
leading English learning school
= IMAGE: range of consumer-focused services from
beauty-care, adult education, sports coaching, etc
Winning
Fund
DEMAND FOR STATUS with increased affluent
also demand association with luxury brand/service
Sequoia’s investment into China’s
leading animation company as demand
ENJOY GREATER LEISURE & ENTERTAINMENT: for cartoon/animation content grows
affluence drives consumers towards spending
more leisure time Estimate 8m Chinese
play tennis with
penetration in urban
areas increasing.
SPENDING ON CHILDREN NEEDS: greater
Currently lack of tennis
affordability to spend on “single” child
facilities hampering
growth of sports
Jan 2010 Version 3.0 by KC Yoon

12. Investment Theme 3 : Potential Investment Targets
Lifestyle & entertainment value chain, Healthcare products, medical service &
Niche-domestic luxury product/services pharma retail
Healthy lifestyle + family- Family/Home use healthcare Medical service retail &
Niche Luxury-products focused entertainment Supplements & equipment hospital services
lifestyle services content & services
• Home-grown fashion • Invest in content creation • Family-use home • Leverage on Govt drive to
design houses /animation companies healthcare check-up devices implement rural healthcare
network
• Beauty/spa chain offering • Family-focused Chinese
traditional Chinese cures & history-based themed
treatment retail/entertainment venues;
• Tennis Academy • Regional cuisine themed
Food service
Jan 2010 Version 3.0 by KC Yoon

13. Potential Investments Targets Across Core Themes
Lifestyle/ Entertainment
Lifestyle retail brands
Services Delivering
leveraging offline +online
Innovative Service
presence to extend
leveraging
brand presence &
internet/mobile
nationwide
technology
ONE: Domestic Brands
Going Nation-wide
TWO: Internet –
Changing the Traditional
Business
THREE: Changing
Lifestyle of Middle-class
China
Jan 2010 Version 3.0 by KC Yoon

14. PE Investments in China’s Retail & Consumer Sector in 2009
Investor
Fund
Sector Company
Company
Value
Fund/ Remarks
Remarks
Invested Company
Consumer Food Yashili Group , Carlyle Group • 17.3% for between USD100-200M
Products- Infant Milk Guangdong • Intention to build industry leader in growth market
Powder with strong 2nd/3rd tier city distribution
Consumer Food Modern Dairy, Anhui KKR • Minority investment
Product- Dairy • Intention to grow market leader with large scale
modern farming technology
Consumer Fashion Daphne International TPG • USD80M for minority stake
Brands (HKSE) • Market leader in value lady shoe segment
- Ladies Shoes
Consumer Food Golden Han Unknown • 30% for USD42M
Service- Restuarants
Restaurant Chain
Consumer Fashion – Guangzhou Meishan Legend Capital • USD10M for minority stake
Hair Accessory Retail • Fast growth & high margin fashion accessory retail
Electronic & Appliance GOME Bain Capital •18% stake for USD430M
Retail (HKSE) • Value-add to improve management efficiency in
China’s largest player
Consumer Retail- Wumart Inc TPG, Legend & • USD212 for 11%
Supermarket Retail (HKSE) Hony Capital
Version 3.0 by KC Yoon

15. M&A Transactions in China’s Retail & Consumer Sector in 2009
Investor
Fund
Sector Company
Company
Value
Fund/ Remarks
Remarks
Invested Company
Acquisition by domestic companies
Consumer Food Beijing COFCO • 100% for USD16M
Product- Wugaodaochang • New product line which will benefit from COFCO’s
Instant Noodles Food large distribution
Consumer Retail- Dalian Dongzhijie Pou Sheng • 70% for USD122M
Sportswear Retail Sports International • Acquisition to access over 440 new distribution
(HKSE) POSs
Consumer F&B- Ji’An Beer Group Tsingtao Brewery • 100% acquisition for USD37M
Beer & Brewery • Consolidation of Shandong beer market
Retail Supermarket Times, HK-based Wumart,
Wumart Beijing’s • Majority stake for ~USD560M
Supermarket chain largest Supermart • Acquisition of management knowhow & operations
technology
Education- Little New Star Noah Education •100% acqusiition for USD113M
Education • Gain revenues & new market reach
Cross-border acquisitions
Consumer Food Little Lamb Hotpot YUM Inc • 13.9% stake
Service- (HKSE) • Expansion of domestic-brand food service portfolio
Food Service Chain in China
Education- Wall Street English Pearson PLC •100% acquisition for USD145M
English • Pearson building domestic business presence
Consumer Fashion Shanshan Group Itochu (China) • 28% for USD111M
Brand- Apparel • Build domestic business
Version 3.0 by KC Yoon

16. Other Notable Features of China PE Transactions in 2010
Include investments into under
under-valued
listed consumer/retail entities (
(eg. SGX)
Deal Sources with objective to add expansion capital &
drive
As market leaders build market share &
consolidate market, opportunities to exit
Exits through investments in smaller brands/companies
Trade Sale by identifying potential strategic portfolio
owner in trade sale
Jan 2009
2010 Version 2.0 by KC Yoon
3.0