Gang WU: Recent Task Is Accumulation

2012-05-07

“PE (Private Equity) industry has no industry access condition. An admixture of the genuine and the false, and “sufficient fund and stupid personnel”, it is not strange at all. Now, I hesitate to ask that I am a PE investor.” a PE investor wrote in the microblog. 

PE industry is converted from an elite industry into the industry labeled with “National PE”, which has been performed by Jiuding Capital Co., Ltd. (“Jiuding Capital” for short) very well.

Such an investment institution, funded by some youths from Wudaokou, within 5 years, has created a more-than-300-staff team, and invested more than 100 projects (including more than 10 listed companies), with the asset scale of more than 20 billion yuan. In chairman of Zero2IPO Group Ni Zhengdong’s opinion, PE industry is increasingly hard to be done well. In the coming three years, it is certain to be reshuffled. After the industry returns to its rationality, how does Jiuding Capital plan?

 Uprising: Man who can’t seize opportunity must be a fool

In 2007, several youths established Jiuding Capital. 

  There was no money, no brand, no background and no history of success but struggling spirit. Jiuding Capital burst into PE industry. From a basement in Wudaokou, to Yingu Plaza in the North Fourth Ring, and then to Winland International Finance Center at the Financial Street, Jiuding Capital only spent nearly 5 years. According to rough statistics of related data, within nearly 5 years, Jiuding Capital has created a more-than-300-sraff team, and invested more than 100 projects (including more than 10 listed companies), with the asset scale of more than 10 billion yuan. 

CDH Investments (established in 2002) and CITIC PE have nearly 100 employees. The Carlyle Group (established in 1985) never exceeded 100 employees in China. 

In 2008, Jiuding Capital was not listed into China;s Top 30 PE Firms 2011 released by Zero2IPO. Jiuding Capital ranked 9th in 2009, 4th in 2010, and 1st in 2011. 

 “When the fund was launched, we have known well about PRE-IPO. We were very clear about what kind of projects could be listed. Simply, the project which meets the requirements of the CSRC can be listed.” Xiaojie HUANG said.

For Jiuding Capital, the biggest opportunity is the second-board market. Jiuding Capital’s partner Gang WU who was interviewed by the reporter of the Time Weekly didn’t deny that, “Jiuding Capital burst into PE industry at the outburst of the capital market. Man who failed to seize such opportunity must be a fool. Many peers said that the competition is too fierce currently. I don’t think so. In the future, PE industry will be fiercer and fiercer.”

Among 28 companies in the first second-board market, Jiuding Capital successfully invested GEEYA and Gifore. The former once became the first bull stock in the second-board market. According to preliminary data, Jiuding Capital has made a profit more than 270 million yuan from Gifore. Therefore, Jiuding Capital achieved instant fame.

2011 was Jiuding Capital’s bumper year. So far, the enterprises which have passed the examination of CSRC for IPO included Lancy, Hainan Ruize, Sanleking, Billions, and Er-Kang Pharmaceutical. Moreover, Sanleking, Hainan Ruize, Billions, Lancy, and Er-Kang Pharmaceutical have been listed in succession.

The data indicate that, by the end of the year 2011, Jiuding Capital has invested more than 120 projects, including 9 listed companies and 4 companies to be listed. Moreover, more than 30 companies have submitted the applications to the CSRC for IPO. Jiuding Capital ranked top according to 515 IPO projects to be examined released by the CSRC on February 1st.

Jiuding Capital was also one of China’s first venture investment companies of the dollar fund. Currently, only Jiuding Capital, Fortune Capital and CITIC PE have completed the raising of the dollar fund for the venture investment.

Expansion: To do things according to markets

At the end of the year 2010, Jiuding Capital has built 30 offices on a national scale, and dispatched some professionals to perform dragnet-type search for Jiuding Capital’s standard target enterprises within the areas under their jurisdictions. Even Jiuding Capital gave up some first-tier cities, such as Beijing, Shanghai, Shenzhen, etc., where it gathers a large cluster of PE firms, and sought for opportunities in some second-tier or third-tier cities, etc. 

“We rarely miss some proper companies without need of financial consultant firms”, Xiaojie HUANG indicated. “Almost all of the projects that China PE firms have seen have been contacted by Jiuding Capital. In general, the reasons that Jiuding Capital gives up the investment are price or concept. It is rare for Jiuding Capital to know nothing about what they talked.”

 “We will contact with all the heads of towns in China, and figure out all the enterprises with more than 100 million after-tax profits of sales revenue”, Xiaojie HUANG said in an activity. But he said that the success rate of projects is 70: 1. 

Such large-scale troop-type operation mode makes the counterparts gasp in admiration. “PE in general is mom-and-pop store or household of individual business in China. It is very normal for you to be surprised at Jiuding Capital’s mode. But facts have proved that it is proper. Many of the VC firms also adopt such mode, e.g., Fortune Capital has built some offices across China. Fortune Capital has owned more than 20 branches in China.” Gang WU told the reporter of the Time Weekly.

As a core member of Jiuding Capital for rapid expansion, Gang WU’s thought is very simple: to do things according to markets. Jiuding Capital’s mode is the most suitable for current Chinese market. During 30 years of the reform and opening-up policy, China has produced a host of excellent SMEs. Objectively, these SMEs need to be listed. Currently, many segmented industries have no listed company.

When Jiuding Capital’s mode has achieved good effect, the insiders made different voices. As for the rumor that Jiuding Capital vied for the projects with a higher price, Gang WU called it as “unthinking idea”. He told the reporter of Time Weekly, “What kind of institutions will vie for the projects with a higher price?” Firstly, there are no enough project sources, while Jiuding Capital has such a big team to seek for the projects. Secondly, there is no brand; the unique possibility for an enterprise selects a non-brand investment institution is its high price. Thirdly, there is no value-added service ability. Fourthly, don’t know the enterprises well; they mistakenly think that each enterprise is like Hepalink. Jiuding Capital has no such reasons.”

Why does Jiuding Capital give you such impression vying for the projects with a higher price? Gang WU explained: Firstly, some of investment institutions make excuses for their failure. Secondly, many enterprises play the fool with us. In order to obtain the high-price investment from other institutions, these enterprises declare that Jiuding Capital has given a high-price investment. “Such phenomenon is very common. Current enterprises are very smart.” As for the rumor that Jiuding Capital has no due diligence, Gang WU thinks it is so funny. Without the due diligence, what does Jiuding Capital’s huge team do each day?

Sediment: There is no plan for expansion currently

With the downturn of the stock market in 2011, PE which depends on the delisting of the secondary market is harder and harder. The P/E ratio is 10 times or so for PRE-IPO projects in the previous primary market, and more than 50 times for the successfully-listed projects. It is easy to earn 5-time, even 10-time return. Since this year, IPO P/E ratio has dropped to 20 times or below, while the valuation in the primary market is maintained 18 times - 23 times.

According to statistical data, the IPO book-delisting return of China PE firms has reduced by nearly 40% on month-on-month basis in February. Most of P/E ratios are lower than 3 times. “The transformation of PE profit mode is inevitable and forced.” Partner of Jinyan Capital Ao Yanjie told the reporter of the Time Weekly, “P/E ratio in the secondary market has been dropping since the first half of the year 2011, so did the P/E ratio of second-board market. Therefore, many high-valuation investment projects last year are possible to have a great deficit this year.”

 “We are also aware of the differentiation of LP’s outlook on the market. The keynote of the previous year was stable rhythm of the investment”, Gang WU told the reporter of the Time Weekly. This year, more attention will be paid to the optimization of process, enhancement of risk control, post-investment management, and specialization road. Through 5-year expansion period, this year should be a sediment period.” 

Future: Main battlefield lies in merger

As far as PE’s future profit mode is concerned, Jiuding Capital has foreseen it. When Xiaojie HUANG was interviewed by the media, he gave his vivid description on PE’s vying for the projects: “fishing for the floated oil on the surface of water”. It is purely a technical job. When the “floated oil” is fished out, it no longer has any chance for large-scale and systematicness. Xiaojie HUANG predicted that, “In 2015, such large-scale, troop-type mode will come to its end”.

As for Jiuding Capital’s future trend, Xiaojie HUANG’s preliminary conception is to: firstly, combine external resources to establish the subsidiaries focusing on early investment; secondly, transform Jiuding Capital with huge team into an investment bank to provide more value-added services. 

In the beginning of the year 2011, Jiuding Capital built China’s first PE-backed training and exchange platform for the senior executives of the invested enterprises - “Jiuding Business School”, which was one of Jiuding Capital’s value-added post-investment services. Head of Jiuding Business School Liu Xuemei told the reporter of the Time Weekly: “Besides the enterprise investment, more attention will be paid to the enhancement of entrepreneurs’ theories and ideas. Many of the invested companies keep upstream and downstream relationship or synergic relationship in the same industry.”

Previously, CITIC PE recruited star fund manager of Huashang Fund Zhuangtao, star fund manager of Harvest Fund Zou Wei, etc. with an attempt to enter the assets management of the secondary market, and has formed a comprehensive assets management company integrating multiple types of business, such as PE, VC, private placement, mezzanine capital, merger, etc., and is marching towards international top PE like Blackstone.

 “It is not Jiuding Capital’s priority.” In Gang WU’s opinion, PE iIndustry has two inevitable development trends in the future. Firstly, moving forwards for VC, that is, in several limited fields, to be finer and more perfect, and to maintain the structure of small-sized company. Secondly, moving backwards for merger. Jiuding Capital has started its attempt and layout in the two aspects early.”

As for VC, Gang WU said bluntly, “It is merely a little part. The main reason is that domestic capital market is not matched. If the substantial delisting of the current market makes no change, China has no real VC. Future main battlefield lies in the merger.” Gang WU disclosed that, with the further segmentation of industry and the further specialization of team this year, Jiuding Capital will invest some smaller projects. In merger, Jiuding Capital will perform integrated investment in the medicine sector this year. So far, Jiuding Capital has completed 7-8 mergers for Gifore.

Before then, CDH Investments, CITIC PE and New Horizon have purchased 55% shares of Luye Pharma Group Co., Ltd. from MBKPartners. This was good evidence. “The merger will become an important approach for the delisting of PE funds. In the coming five years, native venture investments should be delisted nearly 50% via IPO and nearly 50% via merger.” chairman of Fortune Capital Liu Zhou indicated.

To adapt to such transformation, Gang WU indicated that, it is inevitable to adjust current teams “Our mode is to target at current situation and traditional industry. If the market makes a change, the organizational structure also should be adjusted at any time. It doesn’t mean that such mode is matched with such practice. The organizational structure is to serve the business development. The personnel should be staffed according to types of business.” As far as Jiuding Capital’s future is concerned, everything depends on the big environment. Current task is to exercise the “internal organs” to make good preparations.