GEELI FUNDS EXPANSION
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Geeli is one of the top air conditioning manufacturers in China. It aims to become the world's largest manufacturer within 5 years. To fund its expansion, Geeli is considering various financing options such as listing on the Chinese, Hong Kong or US stock markets, issuing corporate bonds or bank loans in China or abroad. Listing in the US has advantages like a sound legal system and lower cost of capital but requires meeting strict criteria. Raising debt in China is challenging due to issues like state control of banks and high rates of non-performing loans. Based on its financials and a net present value analysis, listing American Depositary Receipts in the US stock market seems to be the best option for Geeli to access
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GEELI FUNDS EXPANSION
- 1. GEELI : RAISING FUNDS FOR ITS EXPANSION Group 5
- 2. Agenda
- 5. Issues in the case
- 6. Agenda
- 7. Rational for Expansion capacity
- 9. China Vs. US. market
- 10. What are the "Emerging Markets " ?
- 11. What are the "Emerging Markets" ? Regions Fully industrialized Emerging (rapidly) Developing nation 1. Europe Germany, UK, etc.. Russia, Poland, etc.. Bulgaria, Romania, etc.. 2. Asia Japan... China , etc.. Laos, etc.. 3. Americas USA , Canada... Mexico, Brazil, etc.. Paraguay, etc.. 4. SE. Asia n/a Indonesia, Thailand, etc.. n/a
- 12. The future leaders: BRIC's The report found that developing economies’ share of total global output had risen significantly in the past decade, as nations such as India and China had grown far faster than their richer counterparts. As a result, developing nations accounted for 41 per cent of $58,600bn (€37,000bn, £29,600bn) in total global economic output in 2006 – up from 36 per cent in 2000. BRIC's (Brazil, Russia, India, China)
- 13. The future leaders: BRIC's BRIC's (Brazil, Russia, India, China) Real GDP growth in Brazil, Russia, India and China: 2001-2007 Source: Deloitte’s Global Manufacturing Industry Group
- 16. Distance between Developed market and Emerging market
- 17. Debt or Equity ?
- 18. Geeli Expansion financing options
- 19. Source: Puzzle in Chinese Stock Market Option 1-Equity Share in Chinese Market
- 20. Requirement to be Listed Criteria Chinese Stock Market Hong Kong Stock Market Geeli( Yr 2004) Stockholders Equity US $ 6 Million US $ 12 Mil US$ 247.9 Mil Assets None Net Assets > US$ 40 Mil US$ 359.3 Mil Income from continuing operations None Las Years Profit after Tax Cannot be lower than US $ 7 US$ 95.6 Mil Publicly Held Shares No Market value of publicly held shares No Shareholders Operating History 3 Years Before 1994 Profitability 3 Years cumulative US$ 6 Mil(last yr. US$ 3M;Former 2 Yr combined US $4 Mil) 48 Mil(2003) 62.1 Mil(2004)
- 21. HK Market in comparison:
- 22. Financing Option 1- Contd: Fund Raised by the Chinese Markets & H-Shares of the Hong Kong market (US $ Bn) Source: Hong Kong: A prime centre for Chinese companies in the Primary IPO & Secondary market
- 23. Financing Option 2- US Market (NYSE & NASDAQ) Criteria NYSE NASDAQ Geeli( Yr 2004) Stockholders Equity US $ 15 Million US$ 247.9 Mil Assets Net Tangible Asset =US $ 40M None US$ 359.3 Mil Income from continuing operations Most recent fiscal yr>= US $ 4.5 Mil Last fiscal Year >= US $ 1 Mil US$ 95.6 Mil Publicly Held Shares 1.1 Million 1.1 Million None Market value of publicly held shares US $ 9 Mil Us $ 8 Mil None Shareholders 2000 holders of 100 shares or more 400 Operating History 3 Years None Before 1994 Profitability 3 Years None 48 Mil(2003) 62.1 Mil(2004)
- 24. AMERICAN DEPOSITARY RECEIPT Stock that trades in united states but represents the specified number of shares in a Foreign Corporation. They are bought and sold on American markets just like regular stocks and are issued/sponsored in the U.S by a bank or brokerage.
- 26. ADR Level III Process
- 27. Advantage of Listing in American Exchange: Source: ADR for Listed & Chinese Companies: First Round to the U.S Equity Market
- 29. Comparison- Private Placement Source: Investopedia, Answer.com,
- 39. Criteria Financing 0ptions Equity Availability Our Choice Remarks Chinese Domestic Market -Freezing of IPO from 2005 until August 2006 -Non tradable shares -Quota System Private Placement - Opportunistic behavior - Below the standard Hong Kong Stock Exchange -Expensive -Low Valuation ADR -Sound legal and regulatory framework. - Lower the costs of future capital -Access to high caliber institutional investors Debts Domestic Banks -Non performing Loans -Not well established banks -poor financial derivatives Corporate Bonds -State regulation of price -absence of credit rating -Lack of information disclosure Foreign Banks -Strict Banking Regulation -Less economics of scale
- 40. The expansion project valuation as a U.S. investor
- 43. NPV of U.S. investors Incremental cash flows from expansion ( thousand U . S . dollar ) year 2005 2006 2007 2008 2009 Cash flow - 400,000 57,600 61,056 64,719 68,603 Terminal value with constant growth 1,625,010 Discount factor 0.9052 0.8194 0.7417 0.6713 Discounted cash flow 1,287,158 52,138 50,027 48,000 1,136,994 NPV 887,158 growth rate beyond 2009 6.0%
- 44. NPV & sensitivities for U.S. investors
- 45. What if Geeli is the US. company ?
- 48. Takeaways
- 55. NPV & sensitivities for China investors
Editor's Notes
- Geeli’s growth strategy did not include purchasing assets of a recently bankruptcy competitors because the firms were not in the same geographical region, and thus would make it more costly to coordinate production and transportation, and the assets may be obsolete
- There are three of four major multinational trading blocs (or regions)
- Consider India, China, Russia, Brazil ,They're the next wave of growth markets. There's only one issue. Although in the long-run most of these markets will deliver capital gains dwarfing those of more developed economies (while also providing great dividends), in the short-term many will be volatile. In order to profit, you need a guide, someone to help you uncover the big trends while avoiding the pitfalls.
- Simple. Growing markets = opportunity to make money. Both for companies, and for investors. Any entrepreneur that launches a business that can be successful in emerging markets, stands a chance to capture a massive market. The emerging markets of China, Brazil and India, for example, have an ever expanding population of consumers with ever changing tastes and demands for goods and services. As the people in these places become more wealthy, and as they become more exposed to new ideas, new products and new markets, their tastes and preferences for goods and services will change.
- Emerging market stocks and bonds offer the potential for high return in a relatively short period of time. However, the relatively unstable nature of EME’s is reflected in the risk levels which are usually much higher than those carried by more mature markets.
- Even though there exist great opportunities in EMs, there are also difficulties inherent in doing business in these countries. One aspect is the lack of developed communication infrastructure, which, in combination with often high levels of illiteracy makes it harder for companies to communicate with consumers. Another problem is that emerging markets have relatively underdeveloped financial markets, high volatility in their economic progress, and the institutions for distribution of capital are not as strong as in developed countries. This leads to the notion that capital is not highly available and that it comes at a high cost in emerging markets. Compared to EMs, the financial markets in developed countries are well developed and characterized by e.g. access to venture capital, transparency in accounting standards, and a properly functioning banking system. Furthermore, the government institutions that support business activities are less than in developed countries. Finally, many of the emerging countries have higher levels of corruption than developed counterparts. In contrast, in developed countries companies can rely on a functioning legal system, which includes enforcement of legal contracts.
- Chinese Government Conservative approach