China growth outlook – is anyone concerned?

The Federal Reserve Bank of San Francisco published a recent review (‘Is China Due for a Slowdown‘) of the Chinese economy and whether  we can finally expect a slowdown. The summary reads “While average income in China appears to be headed towards levels that have been associated with growth slowdowns in other countries, high income inequality between wealthier coastal provinces and the less-developed interior suggest that deceleration may not be severe”. So is this good or bad news? As to the consumer story, we look to the US and Asia’s regional consumers in a little more detail below.

Further we read the Goldman Sachs A-Share piece with great interest. In its recent update, Goldman Sachs suggests the following companies, among others, as a Buy-Rating:

– Baosteel – Steel company
– Beijing Capital – Real Estate Developer: Residential, Office, and Commercial in Beijing
– Better Life – Supermarkets
– BlueFocus – Public Relations
– Fiberhome – Telecommunications
– Hualu-Hengsheng – Chemical manufacturer
– Industrial Bank – Industrial Bank, Top 10 in the country
– Jiangsu Yuyue – Medical Equipment
– Jizhong Energy – Coal products
– Ping An (A) – Insurance
– SAIC – Automotive
– Yantai Wanhua – MDI manufacturer, largest in the region

Other stocks that offer a potential upside (on current share price) are Lushang Properties, Jiangsu Zhongnan Construction, China Merchants Bank (A), Shenzhen World Union Properties and Zhejiang Yankong Group.

While this list is interesting and gives a broad range of exposure to various sectors, it masks the wider implications that currently drive the regional and global economy. Access to the these companies is restricted to many investors. Therefore other proxies may serve as an indication of what is truly happening in the region. Below, we take a look at the state of the domestic Chinese banking sector, the regional and global consumer sentiment as gauge for current consumption trends.

Deloitte commented in a report on China’s Banking Industry in its 2012 outlook. The conclusion of the report starts by stating:

“The banking industry of China faces challenges on many fronts – to asset quality, non-performing loan levels and liquidity, to name a few. Emerging risk is perhaps the greatest challenge. With the expected
slowdown in domestic economic growth and weak external demand, new risks in the industry are growing. Industry risk is being controlled, in part, through greater regulatory scrutiny, monetary policy easing, and
local debt approval. The reform of rural financial institutions continues to move forward, further supporting growth in “Agriculture, Farmers and Villages”.”

We couldn’t agree more. The transition from an inward looking banking sector towards an industry that strives to be part of the globalization effort will take time but the forces are at work. Not only is the sector catching up fast, it will certainly lead in a number of segments not before long. The easing of the RMB exchange rate ‘gridlock’ is likely to enable a more balanced approach by its domestic banks in line with investor expectations both domestically and internationally. The domestic banking sector certainly must get its act together to avoid any of the fallacies of earlier decades. Nonetheless, while the housing sector is overheated for some and therefore poses a significant risk, the individual consumer is still striving and aspiring to developed market levels.

To balance our (global) view, we explored KPMG’s US Retail Industry Outlook Survey (2012) to look for evidence that spending on the domestic, eg consumer level, are intact and demonstrate signs of robustness despite the gloom in the global economy. After all, someone has to spend their income for (consumer) goods and thus make the trade to go round; if not the Americans who else we ask. The authors of the report conclude “…retail executives expect the industry to proceed on a path of gradual growth over the next year, supported by continued modest gains in revenue and hiring. Concerns over the US economy are evident, as many executives have pushed back their expectations for a substantial recovery until 2014/2015 or later. While waiting for the recovery to take hold, sector executives are focusing on spending the cash built up on their balance sheets by investing more over the next year in information technology, including data analytics and digital marketing channels.” This makes an OK reading and does not worry us too much as we would expect some level of re-balancing at the individual consumer level. But signs are certainly pointing sideways if not upwards over a medium term view.

PwC - 2012_Retail_Consumer_Products_Asia_Chart16

PwC: 2012 Asia Retail and Consumer Products, Chart 16

The Asian regional consumer behaviour is certainly becoming an ever more important factor as far as the decoupling from the developed world versus developing world is concerned. PwC put out a report entitled 2012 Outlook for the Retail and Consumer Products Sector in Asia and hits the nail on the head. Numbers in China are always big and staggering but these do not change the fact, there are what they are. China’s spending on Food, Beverages and Tobacco will double during period 2011-2015 potentially achieving US$1.4tr in sales. It is thus interesting to note that China has only 2.5 hypermarkets per million people. France, the US, and South Korea have 25, 12.3 and 7.6/ per million respectively. The conclusion is obvious.

In a nutshell, the consumer story in Asia appears to continue to gain traction. Although some believe it is slower than analysts had forecast, it is still a momentum that is gathering pace. And if the classical S-Curve is anything to go by, Asia will soon have a major impact on corporates that serve the regional consumers.

We look at the global conglomerates that can serve the market (Unilever, Kraft, Mars, Procter & Gamble, Johnson & Johnson, L’Oreal, Walmart, Carrefour, TESCO, Metro to name but a few), have the capabilities to develop regional if not local strategies, and the capital to have staying power when things get tougher than anticipated. A clear road map is certainly required to take on these markets. Entering them all at the same time, may just a little bit too challenging for most.


Tesla Motors rumored to IPO soon

The company that made electric vehicles cool again and dispelled the ugly golf cart stereotypes is rumored to file for an IPO very soon according to a recent Reuters report. What makes this CleanTech startup unique from say the recent A123 Systems IPO? Tesla is currently profitable! Profitability is one way to counter the IPO risks noted in this well blogged article about Goldman Sachs and their IPO business.

Tesla is on a mission to prove that Silicon Valley can do what Detroit, Tokyo and Frankfurt cannot. While some may think their Tesla Roadster (costs approx. $109k), which has a range of approximately 220 miles and Ferrari like performance, is a toy for the rich- a new Tesla Model S is in the works to dispel this theory and open the company to those with a smaller budget. The Model S will cost around $50,000, have 4 doors and appear similar to a nice Lexus, but more beautiful in my opinion. It also will not have any tailpipe emissions and will cost about $2 to power for 300 miles.

While Tesla’s automobiles are an evolutionary step as far as design, production and backing- they will nonetheless need to compete with companies like Nissan, GM, Fisker  and Ford who all have both government backing, and either an EV or Plug-in EV in the works. Along with several battery makers including A123 Systems, Ener1 and Johnson Controls, Tesla received $465MM in low cost loans from the US government to help spur development. It is interesting to ponder whether or not the market for efficient automobiles will prefer plug in electrics, pure electrics or if it is large and wealthy enough for both. Signs point to the latter as several of these planned or existing cars, including Tesla’s, have a lengthy customer waiting list.

Tesla’s investors include Google, founders Sergey Brin and Larry Page, Daimler AG, Aabar Investments, Valor Equity Partners, Technology Partners, The Westly Group, Compass Venture Partners. Tesla has also received an ‘opportunistic’ US$82.5m equity investment from a group led by Fjord Capital Management, a private equity firm which focuses exclusively on clean energy. “Daimler, which invested US$50m in Tesla earlier in 2009, along with Aabar Investments, which is also Daimler’s largest shareholder, contributed to the offering to keep its stake at just under 10%. The new money was earmarked for Tesla’s expansion of its retail store network globally.”

The IPO would be the first from a US Automaker since Ford in 1956.

The investment thesis for the Water Industry

Goldman Sachs published a report titled “The essentials of investing in Water, Version 2.0” that gives a sound overview of the sector. My colleague Matthew wrote a blog entry earlier that underpinns the challenges the sector faces.

The World Economic Forum release a report titled “Managing Our Future Water Needs for Agriculture, Industry, Human Health and the Environment.” However it is more the sub title that makes it an interesting read ” The Bubble Is Close to Bursting: A Forecast of the Main Economic and Geopolitical Water Issues Likely to Arise in the World during the Next Two Decades.”

Canadian fusion startup General Fusion raises $22 million

Xconomy first broke the news on 24 July 2009 that General Fusion, a Burnaby, British Columbia-based fusion startup, had raised $9 million out of a $12.5 million equity offering. Then, the investors were undisclosed but include a syndicate from the US, UK, and Canada. The company’s board of directors includes members of GrowthWorks Capital and Chrysalix Energy in Vancouver, BC, Braemar Energy Ventures in New York, and Entrepreneurs Fund in London.

However, on 4 Aug 2009, Reuters reported that General Fusion had quietly raised $22 million in early stage funding from venture capitalists. GrowthWorks Capital, Braemar Energy Ventures, Chrysalix Energy Ventures and The Entrepreneurs Fund combined to provide $9 million for General Fusion. The Sustainable Development Canadian Technology Fund, a government entity charged with financing environmentally friendly technology projects, additionally kicked in more than $13 million, contingent on General Fusion’s ability to meet key milestones.

General Fusion is developing a novel method of energy production called magnetized target fusion in which ionized gas is trapped by a magnetic field and compressed in a way that is safe, clean and cost-effective. The company is currently working on a four-year, $50 million demonstration project (2013). The project is being run in parallel with 2 other massive fusion projects: the $6 billion National Ignition Facility at Lawrence Livermore National Laboratory in the US and the $20 billion ITER project in Provence, southern France. You can read this very interesting Forbes article in Oct 2008 about the race for fusion energy pits a giant reactor in France against 2 upstarts in North America. The other startup is Tri Alpha Energy which is backed by Paul Allen’s Vulcan, Venrock, Enel Produzione SpA, Goldman Sachs and PIZ Signal.

The CEO, Doug Richardson, said that “What we’re trying to do is apply modern technology to an old idea.” The technology was abandoned more than 30 years ago because precision controls, computer processing power and plasma technology were not able to sustain its design. “What we’re doing is taking that technology and speeding it up by about a thousand-fold,” said Richardson. General Fusion claims their fusion reactor will be far cheaper and simpler than those giant and expensive reactors such as the one in France. You can read about General Fusion’s technology on their website or check out this Popular Science article which describes the technology more in length and with pictures as well or the Technology Review article.

If General Fusion can meet its first milestones, it may have access to larger rounds of capital. One investor, the Entrepreneurs Fund, is backed by the Brenninkmeijer family, a wealthy family office in Europe. The Brenninkmeijer family also funds Good Energies, an investor in cleantech projects and an early backer in such solar companies as Q-Cells. On its website, it states “General Fusion is a seven year old pre-IPO technology company. It has just completed phase one and is now starting its second round of financing in order to begin work for phase two.” The company which was founded by Doug Richardson and Michel Laberge in 2002 received its seed financing of C$1.2 million in Sep 2007 from Chrysalix Energy. So probably this news is the 2nd round of financing?

Warburg Pincus

About: Warburg Pincus is a leading global private equity firm. The firm has more than $25 billion in assets under management. Its active portfolio of more than 100 companies is highly diversified by stage, sector and geography. Warburg Pincus is a growth investor and an experienced partner to management teams seeking to build durable companies with sustainable value. Founded in 1966, Warburg Pincus has raised 12 private equity funds which have invested more than $29 billion in approximately 600 companies in 30 countries. Beginning in the late 1980s, the firm has provided more than $4 billion of equity for energy related companies around the world, including: Antero Resources, Bill Barrett Corporation (NYSE: BBG), Ceres, Kosmos Energy, MEG Energy, Newfield Exploration (NYSE: NFX), PowerWind Holding, Spinnaker Exploration and Targa Resources (NADSAQ: NGLS). The firm has offices in Beijing, Frankfurt, Hong Kong, London, Mumbai, New York, San Francisco, Shanghai and Tokyo.

Key Personnel:
Charles R. Kaye, Co-President
Joseph P. Landy, Co-President
Scott Arenare, Managing Director
Timothy Curt, Managing Director
Pat Hackett, Managing Director
Jeffrey Harris, Managing Director
Peter Kagan, Managing Director
Rajesh Khanna, Managing Director
Kewsong Lee, Managing Director
James Neary, Managing Director
Dalip Pathak, Managing Director
Steven Schneider, Managing Director
Chang Sun, Managing Director
Christopher Turner, Managing Director
Bess Weatherman, Managing Director

Warburg Pincus’s portfolio consists of 6 sectors: Financial Services; Healthcare; Technology, Media and Telecommunications (TMT); Energy; Consumer and Industrial; and Real Estate. In the Energy portfolio, the firm focuses in the following areas: Oil and Gas; Power Generation and Transmission; Alternative Energy and Renewables; Innovative Energy Technologies. I highlighted those I considered are Alternative Energy and Renewables:

Ceres, CoalTek, Competitive Power Ventures (the parent company of CPV Renewable Energy), PowerWind, Suniva.

News: In previous blog, I already mentioned about the news that on 27 July 2009, Suniva raised $75m in Series C funding round, which is led by first time investor Warburg Pincus. Also participating in the round were APEX Venture Partners and returning investors New Enterprise Associates (NEA), HIG Ventures and Advanced Equities. The company had raised $55.5 million in its first 2 rounds. Previous investors include Goldman Sachs unit Cogentrix Energy and Quercus Investment. This article mentioned that Suniva could be prepping to go public. The Georgia tech startup claims to have a lower cost way to make solar cells and Suniva has snagged nearly $1 billion in orders from Indian and European solar module makers.

In April 2008, Warburg Pincus announced the closing of Warburg Pincus Private Equity X, L.P. (WP X), a $15 billion fund. Building on Warburg Pincus’ proven track record, the global fund will be invested in core industry sectors, consistent with the firm’s growth-oriented strategy to focus on early-stage, growth and late-stage businesses across North America, Europe and Asia. Existing investors substantially increased their commitments to WP X. The fund’s investors include leading public and private pension funds, endowments and global financial institutions including the Washington State Investment Board and GE Asset Management. The fund also attracted numerous first-time investors, including the Universities Superannuation Scheme and the Teacher Retirement System of Texas.


New Energy Finance: League Table 2008

New Energy Finance recently released the Clean Energy Leagues Table 2008 in March 2009.

The top 10 VC/PE investors by number of disclosed investments are:
1. Good Energies – 21 no. of deals ($65.3m)
2. Draper Fisher Jurvetson – 20 ($102.9m)
3. Kleiner Perkins Caufield & Byers – 16 ($187.2m)
4. RockPort Capital Partners – 14 ($166.3m)
5. Khosla Ventures – 14 ($111.5m)
6. Quercus Trust / David Gelbaum – 12 ($37.3m)
7. Chrysalix Energy Venture Capital – 12 ($12.6m)
8. Demeter Partners – 11 ($51.4m)
9. VantagePoint Venture Partners – 9 ($79.3m)
10. Emerald Technology Ventures – 8 ($41.6m)

The top 10 VC/PE investors by indicative $ amount invested are:
1. Magnum Capital – $910m (1 no. of deal)
2. Doughty Hanson & Co – $735.8m (2 deals)
3. First Reserve Corp – $707m (2)
4. Denham Capital Management LP – $375m (3)
5. Mubadala Development Company – $262.6m (6)
6. General Electric – $257.9m (6)
7. Goldman Sachs – $210.5m (4)
8. Canada Pension Plan Investment Board – $200m (1)
9. Rabobank Group – $193.1m (7)
10. Kleiner Perkins Caufield & Byers – $187.2m (16)

The list of investments are in the report.

Comment: A number of the largest amount of investments are due to PE buyout. For example, the Portuguese buyout firm Magnum Capital has the single biggest buyout deal after agreeing the €1.2bn ($1.5bn) acquisition of the renewable energy assets in Enersis owned by Babcock & Brown, the Australian investment bank and infrastructure specialist, and its listed wind power subsidiary in 4Q 2008. B&B, one of Australia’s biggest casualties of the credit crisis, has put its European wind assets up for sale in a move to raise much-needed cash.