JD Capital Takes 100% ownership of State-Owned Sichuan Mining Group
2014-12-30
On December 26th, the Sichuan Mining Machinery (Group) Co., Ltd. (“the Sichuan Mining Group”) announced that JD Capital will acquire a 100% stake in the company and take control. This is the first time for JD Capital to both acquire and hold a state-owned enterprise.
The Sichuan Mining Group was founded in 1958. It now has more than 2000 employees and a plant that covers over 600mu (about more than 400,000m2). The Sichuan Mining Group’s overall strength has been among the best in China for many years. It is one of the country’s leading enterprises in the machinery and equipment industry.
Research shows that the mining sector is rapidly transforming on a global scale. The growing need for minerals in developing countries has contributed to most of the growth in this industry. In China, the mining machinery business is still at an early stage in its consolidation cycle, as shown by the saturated industrial landscape with few major players.
JD Capital believes that activities such as M&A and restructuring will increase the portfolio company’s efficiency. After the acquisition of the Sichuan Mining Group, JD Capital intends to concentrate on developing a global strategy and acquiring more companies in the mineral machinery industry. The goal is to build a platform for the whole industry and to the Sichuan Mining Group as the main pillar of that platform.
Lei CAI, partner of JD Capital, states that this takeover is crucial for both JD Capital and the Sichuan Mining Group. With this solid start from the partnership with Sichuan Mining, JD Capital plans to tap into the new field and spur greater collaboration between itself and state-owned enterprises.
New PE Mode: Hold a small amount of stock to 100% control
The mode of holding a small stock amount to 100% control is very popular among Chinese equity investment sector. It’s not the first time for JD Capital. Besides Sichuan Mining Group, JD Capital signed a strategic cooperative agreement with Baoding Traditional Chinese Medicine Co., Ltd. (Baoding TCM) on November 18th to transfer 60% of its stocks.
It’s more cautious to select controlling projects, so does JD Capital invest in Baoding TCM with a clear history, complete assets and perfect equity, laying a solid foundation for capital operation.
PE firms also prefer to those outstanding projects among an industry. Taking medicine industry as an example, JD Capital has accumulated rich experience in it. According to its public transfer statement, JD Capital has invested in 29 medical projects by the end of December 31st, 2013, with 36% of IRR of exit projects and 40 % of IRR of managing projects.
From 2009 to 2010, PE firms always invested a small amount and obtained high profits by the different price during primary and secondary markets, which was called IPO Era by Lei CAI, but the era would not last for a long time. Lei CAI believed that various investment modes and means would be appeared in future.
Among the mature capital markets, M&A was usually done by large-sized PE firms to integrate industrial resources and acquire enterprises and competitors to lower cost and enhance price and market value. China was undergoing this way. US TPG transferred Shenzhen Development Bank to China Pingan and gained a lot after acquiring it is a good example.
Industry and investment combined
As Chinese capital market and investment industry became mature, the investment was declined in proportion, while the angel investment, VC investment and holding investment kept rising.
When selecting partners, enterprises with clear capital intention would not only increase capital by financing, but also paid attention to investors’ soft power in industrial integration and operation, such as the ability to lower cost, increase sales and enhance strength, no matter in primary market or secondary market.
The fiercer competition among PE firms was forcing the industry to transform. Wu Qinggong, Head of JD Capital’s medical business, introduced that transform from holding a small amount of stocks to control a company required modern management systems, which was an important step to realize capital transform.
Industry officials stated that controlling an enterprise was not the final target, but one of important means of industrial layout. After controlling the invested companies, industrial integration could be achieved. The two means were periodical in capital operation.
Jin Jianhua, Executive President of China Venture, has said that the cooperation between the listed companies and PE/VC when merging was a transition phase. In future, the merging would be finally transformed to controlling. Under the background of structural adjustment of Chinese economy, many industries were in the integration phase. In 2014, merging increased explosively. According to China Venture, there were 1,216 disclosed merging events, with a total amount of nearly 19 trillion US dollars.
Large-sized equity investors have transformed to intensive cultivation. How to fully display the advantages of industrial capital and integrate the industry of the investees would upgrade its business and management, which were opportunities and challenges for PE.