ARC China Weekly News Summary

China’s Auto Sector Symbolic of Larger Economy

While global car sales languish and US auto giants GM and Chrysler try to emerge profitably from a government-assisted bankruptcy process, China’s car sales rose 48% in June from the same month last year to 872,900 units as China has solidified its position as the top vehicle market in the world.

Total vehicle sales in China for 2009 are expected to exceed 11 million units while in the United States analysts forecast sales of around 10 million units. United States auto sales fell 28% in June from a year earlier.

In China, many carmakers have been forced to ramp up production to meet demand, and shortages of inventory have been reported at many auto dealerships.

This healthy domestic consumption has been spurred on by strong consumer confidence among the Chinese people. According to Mike Dunne of JD Power, and as reported in the Financial Times, “the government is putting out a strong message that the financial crisis is concentrated in the US but we in China are doing just fine. The world might be hurting but not us.”

Meanwhile China’s June exports showed month-on-month growth of 7.5% to $95.4 billion, the highest monthly total since December 2008. The new trend of recovery in the Chinese export economy combined with accelerating domestic consumption provides even more signs that China is on track to meet its benchmark 8%+ growth target during 2009.


China Think-Tank Sees 8% Growth in 2009

China will expand about 8 percent this year, a leading think-tank said, the latest in a series of broadly bullish reports reflecting the growing momentum of the world's 3rd largest economy.
The State Information Centre, which reports to the National Development and Reform Commission, China's top economic planning agency, confirmed “the Chinese economy has successfully touched bottom and has started to rebound.”

In addition, The International Monetary Fund recently became the latest organization to take a rosier view of China's prospects, raising its forecasts for GDP growth this year and next by 1 percentage point to 7.5 percent and 8.5 percent, respectively.

The World Bank, the OECD and many banks recently upgraded their forecasts as evidence mounts that massive fiscal and monetary stimulus is likely to lead to full-year growth close to the government's 8 percent target.

Indeed, the official Xinhua news agency cited unidentified statistics officials as saying gross domestic product growth was already 'close to 8 percent' in the second quarter.
The figures are due on July 16.
Source: Forbes Magazine

Shanghai Opens Door to Foreign PE funds But Relocations Will Take Time

Foreign private equity (PE) and venture capital (VC) firms will soon be able to open fund management offices in Shanghai. While China is seen as a desired spot for private equity to be, don't expect a big rush of firms to fill vacant office space in the city.

"An important consideration for the PE firms thinking of renminbi funds is going to be whether additional liberalization will help them raise funds and source deals," said Basil Hwang a partner with Dechert, an international law firm with offices in Hong Kong and Beijing.

Blackstone, the large US private equity firm has reportedly expressed interest in setting up in the city, but smaller firms are more likely to "adopt a wait and see stance" said Sumeet Chander, China country manager for Evalueserve, a global researcher provider based in Shanghai.
The district government this month made it clear that attractive tax incentives are available in Pudong for foreign fund management companies. These include a 40% refund on taxes paid for senior management, and a 20% refund for other key personnel.

The business scope of these PE funds would also be expanded beyond what is available under the current system of representative offices or wholly-owned consulting.

Being located in China would potentially allow the PE funds to raise capital locally – and in renminbi – and allow cooperation with local firms, said Chander. The city will benefit as well. It will realize another step in its goal of becoming a global financial center.

"I think it will help the domestic growth capital and private equity by having more international experience involved in that sector," said Hickman. "Domestic firms will have exposure to other types of practices."

It would also attract the talent that Shanghai needs to bring to develop the local PE and growth capital industry.

"Allowing foreign fund managers to come in work in Shanghai is going to open the door for people from all over the world to do what they're best at in Shanghai, which is to manage capital," Hwang said.
Source: China Economic Review

Shenzhen Exchange Talks Up Vision for Chinese Nasdaq

After close to 10 years of preparation and the recent approval of listing rules by the China Securities Regulatory Commission, the Shenzhen Stock Exchange's highly anticipated Growth Enterprise Bourse -- dubbed China's Nasdaq -- is said to be ready to launch at a date near China's National Day on October 1.

Song Liping, general manager of the Shenzhen Stock Exchange, says with the launch of the new bourse, much needed capital will be injected into China's small- and medium-size companies and developments in the nation's nascent venture capital and private equity industries will be accelerated.

The development of venture capital financing has been stuck in a bottleneck, says Song.
Most VC funds in China tend to prefer mature and late-stage investments. They also exhibit a bias against funding younger these firms of much needed capital for ongoing development.

In 2008, venture capital investments totaled only $4.2 billion in China, which translates to only 0.1% of the country's GDP, compared to about 1% in developed markets. In particular, Song notes that between 2003 and 2008, only about 20% of all VC investments, or $2.3 billion, had been dedicated towards seeding new companies.
Source: Zero2IPO

Metals and Mining

China’s Iron Ore Prices Jump 5%, May Extend Gains

Cash prices of iron ore shipped into China rose as much as 5 percent last week, and may extend gains as some suppliers cut sales and concerns rise about a possible crackdown on traders in the world’s biggest buyer.

Prices for immediate delivery of Brazilian iron ore rose as much as 35 yuan to 730 yuan a ton last week, Umetal Research Institute’s Beijing-based analyst Du Wei said in a phone interview. Ore from Australia gained 4.8 percent to 660 yuan while Indian supplies rose 4.7 percent to 670 yuan.
Vale SA, Rio Tinto Group and BHP Billiton Ltd., the three largest suppliers, are cutting cash sales to China to ensure supplies to customers in Europe, Japan and South Korea who have agreed contract prices, Umetal’s Du said.

China this week detained the head of Rio’s iron ore operations in the country and three colleagues for allegedly stealing state secrets.

“The price gains are mainly due to reduced spot sales to China as the miners sell more contract ore to other countries,” Du said. Demand and prices for Indian ore may increase should the Chinese state investigation discourage purchase of ore from Australia and Brazil, she said.
Chinese mills are holding out for lower annual contract prices after other Asian mills settled a 33 percent price cut. Cash prices have risen 32 percent since an April low, according to Metal Bulletin data.

China’s iron ore imports rose 3.4 percent in June to the second highest level this year, customs data showed. Imports were 55.3 million metric tons last month.

That is 3.4 percent higher than 53.5 million tons in May and 46 percent higher than a year ago. The shipments hit a record of 57 million tons in April.

Hu’s detention, along with three colleagues, may be part of a broader investigation into alleged kickbacks among traders and steel mills, according to the Australian Financial Review.

“China may buy more from India if they lower purchases from Australia,” R.K. Sharma, secretary general of the Federation of Indian Mineral Industries, said. “It’s really too early to say anything or quantify in terms of increase in purchases.”

Australia’s Port Hedland, which handles shipments from BHP and Fortescue Metals Group Ltd., shipped 12 percent less ore to China in June from a month ago. These sales dropped to 9.37 million metric tons from 10.59 million tons. Exports to Japan almost doubled to 2.18 million tons, the figures showed.
Source: Bloomberg

Vale Says Won't Budge on Ore Benchmark for China

Brazilian miner Vale said that China will have to either take or leave existing iron ore benchmark prices negotiated with other Asian mills, refusing to offer greater discounts amid tense price talks.
China is demanding price cuts of at least 40 percent from last year's benchmark ore prices, threatening to unravel a 40-year-old system for setting the mineral price as steel mills increasingly look to a nascent spot market for supplies.

"The benchmark is given. It is established. It is clear," Vale Chief Executive Roger Agnelli said.
Ore prices have for years been set in talks between mills and the world's largest global miners -- Vale, Rio Tinto and BHP Billiton -- and set through annual contracts that expire in June.
If the steel mills and iron miner fail to reach a compromise, miners are free to sell ore under any terms agreed by the buyer and the seller.
Source: Reuters

Consumer / Retail

Fiat Pursues New JV in China

Fresh from acquiring Chrysler, the Italian automaker Fiat has inked a deal to form a joint venture with Guangzhou Automobile Group.

The agreement, signed in Rome on July 6 in the presence of Chinese President Hu Jintao and Italy Prime Minister Silvio Berlusconi, is another step toward turning Fiat into a global automotive giant. Targeting the growing China auto industry, Fiat will invest $559 million in the venture, which plans to begin production in China's Hunan Province in the second half of 2011.

The facility will initially have the capacity to make 140,000 cars and 220,000 engines per year, and may later increase to maximum of 250,000 cars and 300,000 engines per year. The first model to roll off the production line will be the Linea sedan.

Analysts welcomed the deal, calling it vital if Fiat is to match with CEO Sergio Marchionne's ambition. The Fiat chief reckons that the Turin automaker needs to increase its global production capacity from 2 million today to more than 5.5 million — a size that surely necessitates a large presence in what will soon become the world's biggest car market. Guangzhou Auto operates successful and profitable partnerships with Toyota and Honda, both of which have factories in Guangdong, which neighbors Hunan. Honda Accords and Toyota Camrys made at the plants are both hot sellers, especially in southern China. "It is a good move by Fiat," says Michael Dunne, managing director at J.D. Power (MHP) in Shanghai.

Whether it will be enough to go beyond kick-starting Fiat's Chinese operations, though, is harder to say. Fiat is a laggard in China after previous attempts to manufacture in the Middle Kingdom didn't work out.

In 2007, Nanjing Automobile pulled out of another joint venture agreement (JVs are a requirement for foreign automakers to make cars in China) amid weak sales. In the final year of the partnership, Fiat sold fewer than 20,000 cars, and the factory was eventually sold off to Volkswagen. That left Fiat with a tiny foothold in the market, exporting barely 4,000 cars a year from Europe.

A route back via a partnership with Chery Automobile, China's biggest independent car-maker, didn't get off the ground. The two automakers planned to make and sell 175,000 Alfa Romeo, Fiat, and Chery branded cars in China with production due to start this year. "This is also a good basis for studying further cooperation with Chery in the automotive industry," Marchionne said when the deal was announced in 2007. But in March Fiat and Chery canceled the deal, blaming the global downturn.

That excuse rings a little hollow now, although the Chinese auto market has recovered beyond most expectations this year. At the start of the year, many automakers were projecting a flat year at best, but the market, buoyed by tax breaks and other incentives, is up 20% over 2008. Further into the future, China's high economic growth rates and huge population suggest demand for autos will continue to outstrip the developed markets of Europe, Japan, and the U.S.

For all the opportunities, though, Fiat must overcome some serious hurdles if it is to succeed in China. For one thing, Fiat can't afford another misstep. "The Guangzhou relationship appears to be Fiat's last chance to create a meaningful presence in China," says Ashvin Chotai, managing director of London consultants Automotive Intelligence Asia. He warns that Fiat's brand image in China is poor and that, with production still over two years away, it's unlikely the business will add to the company's bottom line inside five years.
Source: Business Week

Recent Transactions

Noah Education Completes $16.5 Million Acquisition of Little New Star

Noah Education Holdings Ltd. (NYSE: NED), a leading provider of interactive education content in China, announced the completion of its acquisition of 100% interest in Little New Star Education Group ("Little New Star"), a Changsha-based private education service provider that specializes in providing English language training for kids.

The total consideration of the acquisition is RMB113 million ($16.5 million), comprised of a combination of cash and stock. Noah expects the newly acquired business to contribute between RMB 13-15 million to net profit in fiscal year 2010.

"We are extremely pleased to have finalized this transaction that will transform our company into a more comprehensive supplemental education services provider for children aged 3-19 in China," said Mr. Dong Xu, Noah's Chairman and Chief Executive Officer. "With the acquisition of Little New Star, Noah gains a well-known brand name in English training for children, a nationwide network of Little New Star learning centers, a well-respected professional teaching team and an industry-leading teaching and training system that is highly scalable. We expect the combination of Noah's nationwide distribution channel and sales and marketing expertise in China with Little New Star's reputable teaching methodology, outstanding content development capabilities, and well-established teacher training program to provide Noah with greater growth potential, synergies and a stable recurring revenue stream. We are confident that this transaction will further strengthen Noah's competitive position in China's education market."
Source: Zero2IPO

Skystar Bio-Pharmaceutical Closes $21 Million Common Stock Offering

Skystar Bio-Pharmaceutical Company (NASDAQ: SKBI) ("Skystar" or the "Company"), a China-based producer and distributor of veterinary medicines, vaccines, micro-organisms and feed additives, announced that it closed its previously announced public offering of 1.4 million of common stock and an additional 210,000 shares exercised by Rodman & Renshaw, LLC as part of its over-allotment option. Gross proceeds to the Company from the offering, prior to deducting underwriting discounts, commissions and offering expenses, were approximately $21 million.
The Company is expected to use the net proceeds from the offering to complete a new vaccine facility; construct a new production facility for micro-organisms and feed additives; acquire other companies in the veterinary healthcare industry in China; and for working capital and general corporate purposes, including research and development and marketing.

Rodman & Renshaw, LLC, a subsidiary of Rodman & Renshaw Capital Group, Inc. (NASDAQ: RODM), acted as sole book-running manager for the offering.

Skystar is a China-based developer and distributor of veterinary healthcare and medical care products. Skystar has four product lines (veterinary medicines, micro-organisms, vaccines and feed additives) and over 170 products, with over 40 additional products in the developmental stage. Skystar has formed strategic sales distribution networks covering 29 provinces throughout China.
Source: Market Wire

www.proactiveinvestors.co.uk