Jiuding Capital: Ranking First among Privately-owned Firms with the Lowest PE Cost


A-share market was less than satisfactory in recent two years. Most of investors were in a big loss. However, PE (Private Equity) companies made a large sum of money. What are the reasons for relatively-high profit in the poor market performance? We will roll out series reports for top 10 upstart PE companies to report how these companies became upstart. Today, we will report Jiuding Capital which ranked first among China’s Top 30 PE Firms 2011. 

Jiuding Capital ushers in a harvest time 

Recently, a listed company on the second-board market released an announcement on the desterilization of non-tradable shares, which raised concern on Jiuding Capital, a PE firm. Gifore Machinery (300022) released an announcement on the desterilization of non-tradable shares that, 16,640,000 non-tradable shares were about to be listed and circulated since May 9th, 2012, accounting for 4.66% of the total shares.

According to the announcement, the shareholder for the non-tradable shares was Jiuding Capital Co., Ltd. (“Jiuding Capital” for short) which ranked first among China’s Top 30 PE Firms 2011. It is learned that, as time goes on, Jiuding Capital’s non-tradable shares in the listed companies will come to the desterilization period, so Jiuding Capital will usher in a harvest time. 

The data indicate that, among 28 companies in the first second-board market, Jiuding Capital invested Gifore and GEEYA (300028). In 2011, Hainan Ruize (002596), Billions (002601), Lancy (002612), Sanleking (300247), Er-Kang Pharmaceutical (300267), etc. invested by Jiuding Capital have been listed in succession.

According to incomplete statistics, followed by Gifore’s the desterilization of non-tradable shares, 2,500,000 shares held by Xiamen LONGTAI Jiuding Capital, 4,500,000-share Hainan Ruize held by Jiaxing Jiahao Jiuding Capital, 5,820,000-share Billions held by Shanghai Kunwu Jiuding Capital, 5,769,300-share Lancy held by Suzhou Zhou Yuan Jiuding Capital, 4,005,000-share Er-Kang Pharmaceutical held by Beijing Kunwu Jiuding Capital Medicine Investment Center, etc. will be desterilized in succession.

According to statistical data, within 5 years since establishing Jiuding Capital, the equity investment funds affiliated to Jiuding Capital have invested more than 100 projects, with the asset scale of more than 20 billion yuan. Besides the above-mentioned listed company Gifore, more than 20 companies among Jiuding Capital’s invested companies are queuing up for IPO. Jiuding Capital will usher in a “harvest time”.

Considerable Return on Investment

Return On Investment (ROI) is to measure the multiples of profits that PE firm invests unlisted company. When PE’s shares for the listed company are not sold, ROI is presented by the book-delisting return. Once the unlisted companies that PE firms have invested before restarting IPO are listed, PE firms can be returned up to several or tens of times. 

Jiuding Capital’s investment in Gifore is the best example. In October 2009, the first second-board market companies were listed wholly, the share price of Gifore rose by 300% or above, being the highest PE investment return in the second-board market. The data indicate that, prior to listing of Gifore, Jiuding Capital has purchased 3,200,000 and 1,600,000 initial shares of Gifore with the share prices of 4.3 yuan and 4 yuan, and then expanded its capital up to 6,240,000 yuan through share transfer. Its cost price amounts to 3.2 yuan per share, while yesterday's closing price of Gifore was 33.12 yuan per share (after the resumption of the exercise).

With high return on investment, Jiuding Capital ranked first among China’s PE Firms 2011, and was awarded China’s Best PE Firm 2011, appraised by China equity investment third-party research institution Zero2IPO Research Center.

The data indicate that Jiuding Capital’s book returns were 10.24 times for Goldcup Electric Apparatus (002533), 9.82 times for Billions and above 7.8 times for Huifeng Agrochemical (002496). 

According to ChinaVenture’s data, in the first quarter of the year 2012, 50 VC firms through the listing of 31 enterprises realized the delisting of 62 IPOs, with total book-delisting return of 6.23 billion yuan, and average book return rate of 3.72 times. 

Jiuding Capital with the Lowest Cost

Recently, the CSRC released “IPO Declaring Enterprise Basic Information Table” again. The data indicate that by the end of May 3rd, 653 enterprises are queuing up for listing, among which 181 enterprises have passed the examination of the IPO Examination Committee and were at the pre-announcement stage (or to be submitted to the CSRC for IPO within 1-2 months). According to ChinaVenture’s statistical data, 74 VC/PE-backed enterprises involved more than 100 investment institutions.

According to announced enterprise prospectuses, ChinaVenture performed the statistics of the P/E ratio of investment projects, and then calculated the weighted average of investment costs of investment institutions according to investment amount to get the average investment costs of the VC firms. Among these companies, Jiuding Capital’s P/E ratio was lowermost, merely 8.7 times. 

Under the circumstances of the reduction of A-share IPO P/E ratio, weakness of secondary market performance, and the restriction of “purchasing the upcoming stocks”, the maximum cost brings Jiuding Capital relatively favorable position compared with its counterparts. For the institution investors, the investment in listed companies is expected to enjoy two pieces of cake: the valuation difference of secondary market enterprise (that is, book-delisting return) and the profits from the fluctuations of secondary market share price. The poor performance of the secondary market means shrinkage of profits. 

The analyst pointed out that, the implementation of the second-board market delisting provision can sort out the disorderly venture investment market. In the interview, most of people expressed to the reporter of Investment Express the same opinion that PE industry is about to face a new round of reshuffle; under the game rule of “the survival of the fittest”, some powerful venture investment companies will continue to stay in the market, while a host of venture investment companies will leave this stage. 

The above-mentioned analyst told the reporter of Investment Express that the valuation of future private equity investment will be less than 10 times, and the whole investment will be difficult increasingly. What is the reasonable P/E ratio valuation in the future? The analyst indicated that no more than 10 times valuation is reasonable, and 10 times is an early warning line. Jiuding Capital is able to lower the P/E ratio of relevant companies less than 10 tines, which shows its relatively-strong competitiveness.

The secrets behind Jiuding Capital

Jiuding Capital was the fastest-growing, the most vigorous company in PE industry in recent years. What are the secrets behind Jiuding Capital? The investor who was interviewed by the reporter of Investment Express pointed out that, in recent years, PE market was growing vigorously, and Jiuding Capital advanced by leaps and bounds, and expanded continuously. Anyway, only especially-vigorous extremely-excellent talents can do in such way. 

Currently, most of profits in China PE industry come from simple price difference of the system, and the company listing is a big probability event. Recruiting employees, building professional teams, training them strictly, performing due diligence, launching the “production line” when a “production line” is ripe, grasping project resources as soon as possible. 

 The data indicate that, Jiuding Capital’s on-site due diligence usually takes 3 weeks or so. Firstly, Jiuding Capital will interview the heads of the departments in production, sale, purchasing, etc., administrative and personnel department, workshop director, foreman, group leader, product manager, and business personnel. Secondly, Jiuding Capital will investigate the enterprise’s upstream suppliers, downstream channels and clients, and exchange with competitors and industry associations. At the end of the business survey, the financial auditors get involved. Finally, the business group interviewed corporate senior executives like chairman. After completing the due diligence, nearly 100-page investigation report will be given. Even if Jiuding Capital gives up the investment, Jiuding Capital will give the enterprise a nearly 10-page proposal. 

Jiuding Capital’s personnel who was interviewed by the reporter of Investment Express expressed that Jiuding Capital’s logic is simple; by the end of the year 2020, more than 2000 listed companies in China will be expanded up to 8000. The remaining more than 5000 enterprises include nearly 50% influential enterprises, 400 big enterprises or state-owned enterprises, and some SMEs. Jiuding Capital can occupy 10% of them, nearly hundreds of billions yuan profit.