China, the only major economy to grow in 2020, will gallop ahead at 8% in 2021, double the global rate

1. Pandemic? What Pandemic?

China’s Communist Party will mark its 100^th birthday in July 2021 with typical pomp and ceremony. Celebrations will be cheered by an economy which shrugged off the effects of the Covid-19 pandemic remarkably quickly.

China recorded a sharp slowdown in Q1 2020, as the first country to be hit by Covid. China’s GDP dropped more in those three months than during the 2009 global financial crisis.

Beijing took the unprecedented step of locking down Wuhan a year ago, on 23rd January 2020. Economic activity and travel across the country ground to a virtual halt in the following months until the virus was stamped out. The Government tested repeatedly and widely for Covid, and on a scale other countries can only dream of: For example, in Qingdao, 12 cases in October 2020 resulted in nine million residents being tested in just five days. Unlike Western countries like the US, which focused stimulus efforts on lowering borrowing rates and handing out money to consumers, Beijing focused on restarting factories while keeping interest rates relatively high.

China’s factories came back online from April 2020, as the world’s manufacturing capacity was sputtering to a halt in the face of the devastating pandemic. China actually benefitted from the global slowdown, producing and exporting huge quantities of medical equipment, face masks and work-from-home electronics, such as laptops and monitors.

The Chinese economy roared back to life in Q2: year-on-year GDP went up by 3.2%.

China avoided consecutive quarters of negative growth, escaping the technical definition of recession. China was the only major country recording positive growth in Q2 2020.

China GDP continued to grow in Q3 2020, with year-on-year growth of 4.9%.

The pace has since accelerated. The Chinese economy grew 6.5% in Q4 2020, compared to a year ago. This was notably higher than pre-pandemic growth rates.

Chart 1 – China actual quarterly GDP growth % 2019 to 2020

Source: OECD

2. Thirty five years of growth

China’s economic miracle has lasted more than three decades. After recording 10% growth in 1987-88, China slowed in 1989-90, following violent repression of the pro-democracy protests in Tiananmen Square, Beijing, in June 1989. That led to a stark interruption of steady liberalization of the Chinese economy.

High growth rates returned quickly by 1991, and ran unabated until 2019. GDP grew by more than 9% per annum over those thirty years.

Of course, there have been significant hiccoughs along the way. The Chinese economy was already slowing dramatically before the outbreak of Covid, recording GDP growth of only 6% in 2019.

Going into 2020, The World Bank forecast 1%-2% growth for China; the IMF forecast 2%.

China’s eventual 2.3% growth in 2020 bucked the global trend. Other nations are still weighed down in the throes of the pandemic. All major global players except China, will record negative annual growth in 2020, according to IMF and the World Bank. And yet, the pandemic is apparently receding in the rearview mirror for China.

The World Bank estimates the US economy shrank by 3.6% in 2020, Japan shrank by 5.3%, and the Euro area shrank by a depressing 7.4%.

Chinese GDP per capita now exceeds US$10,000 for the first time in history, with almost no population growth at all.

Chart 2 – China actual GDP growth % 1985 to 2020 and forecast to 2025

Source: IMF

3. An aggressive President Xi

President Xi Jinping this week restated the importance of economic growth, highlighting “balance” in the Chinese economy, with strength in agriculture, more investment in infrastructure, and innovation in the tech sector.

President Xi reported reliable harvests and grain production for 17 years in a row, as well as breakthroughs in scientific explorations including the Tianwen-1 (Mars mission), Chang’e-5 (lunar probe), and Fendouzhe (manned deep-sea submersible). Development of the entire Hainan island, which is comparable in size to Taiwan, into the Hainan Free Trade Port, is proceeding at pace.

2021 will also mark the start of China’s 14th five-year plan, a closely watched road map covering 2021–25.

The World Bank is optimistic about China, predicting 2021 GDP growth of 7.9%, almost double the global growth projection of 4%.

Of course, outside observers are sceptical about the accuracy China’s reported figures, which are presented as part of President Xi’s nakedly political PR efforts. Nonetheless, BDA sees clear evidence of confidence and momentum, as Chinese private equity and IPO markets remain positive. It will be harder to achieve double digit growth, given the bigger base today, but there’s every reason to see that China will keep growing well.

Ignoring wide criticism of China’s maritime expansion, iron fisted rule over Hong Kong, and repression over the Uighurs in the northwest, Xi Jinping is asserting himself as aggressively as ever: “China will keep striving, marching ahead with courage, to create brighter glory”, he stated in his New Year’s address.

China’s ability to expand, even as the world fights to control Covid that has killed two million people, underscores the country’s success in taming Covid within its borders, and cements its unchallenged role as the dominant economy in Asia.

For now, the economic data reveal an economy still driven primarily by industrial production and investment rather than consumption. And yet, China consumer confidence is also recovering well.

4. China is unique

China’s growth makes it an outlier even among the greatest global economies. The World Bank expects the US economy to have contracted by 3.6% in 2020, and the Eurozone’s to have shrunk by 7.4%, reflected in global economic contraction of 4.3%.

This good momentum means that further recovery in China will likely have to take place without significant stimulus from the Government.

Provincial and local governments in China have some US$300bn in unspent stimulus money left over from 2020.

The export bonanza saw China ship 224 billion masks around the world from March to December 2020: 40 masks for every man, woman and child on the planet outside of China.

Domestic consumer demand may be sluggish in 2021, as wage growth is not yet back to pre-pandemic levels. That may explain Xi’s efforts to sound bullish, but the CCP under Xi tends to avoid sharp turns in policy.

China’s increasingly tense relationship with the US has caused China to pivot towards the EU, which was supported by both sides reaching an agreement on the EU-China Comprehensive Agreement on Investment in late 2020. Contrast this to the US, where in his final weeks in office, President Trump tightened restrictions on Chinese companies, to curb China’s tech sector dominance. This tension is worrying to financial markets. Wall Street is watching to see whether the incoming administration under President Biden will soften this stance at all.

Meanwhile, life continues relatively undimmed across China. People are going to restaurants again, particularly in affluent cities like Shanghai and Beijing. Service businesses like hotels and restaurants are performing well in the big coastal cities, but have not yet recovered in the inland provinces.

After its staggering success in taming the coronavirus, China has suffered renewed smaller outbreaks in the last month or so. The government mobilized quickly, building hospitals, imposing mass testing and putting 30 million people back under lockdown. The intrusive health checks will discourage consumers in the northeast from spending. Chinese families remain wary of big-ticket expenditures, new cars, or extensive home remodeling.

Retail sales growth stuttered in December, slowing to 4.6% from 5.0% the month before. The “Made in China” label has gained popularity, as people stuck in their homes cautiously redirect their spending. The consumer electronics sector has been especially resilient.

Beijing has ramped up its infrastructure spending. Every major city in China is now connected with high-speed rail, enough to span the continental US seven times. New lines were rapidly added last year to smaller cities. New expressways crisscrossed remote Western provinces. Construction companies turned on floodlights at many sites so that work could continue around the clock.

Despite reports to the contrary, China remains the workshop of the world. China’s exports grew 18.1% in December compared with the same month a year earlier, and 21.1% in November.

IPOs are booming as entrepreneurial companies go public at breakneck pace, across China. At BDA, we see M&A markets which are robust, and booming.

This explains why private equity and institutional investors are betting that China, which seemed like it might fall out of fashion in 2020, will continue to shine, and outperform the rest of the world.

Miraculously, China is approaching the Lunar New Year in rude health. 2021 will be the Year of the Ox, a fitting image for the Chinese economy.

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with 25 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes. BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

US securities transactions are performed by BDA Partners’ affiliate, BDA Advisors Inc., a broker-dealer registered with the Securities and Exchange Commission (SEC). BDA Advisors Inc. is a member of the Financial Industry Regulatory Authority (FINRA) and SIPC. In the UK, BDA Partners is authorised and regulated by the Financial Conduct Authority (FCA). In Hong Kong, BDA Partners (HK) Ltd. is licensed and regulated by the Securities & Futures Commission (SFC) to conduct Type 1 and Type 4 regulated activities to professional investors. www.bdapartners.com

Euan Rellie, Co-Founder and Senior Managing Director of BDA, in New York, recently joined a webinar International Business Briefing: What is the Future of the China Market, hosted by the US-China Business Council and Faegre Drinker.

Euan shared insights on M&A trends in China and Asia:

China M&A Overview
- In 2019, China-related M&A transactions slumped significantly, reaching the lowest transaction value since 2013
- Major drivers were: Drop in outbound M&A (dropped 37% in value) and Drop in Private equity deals (dropped 22%)
- Outbound deals have been discouraged by increased scrutiny of CFIUS review in the US; national security review in Europe; Beijing’s controls on outbound capital flows
- Inbound transactions reached US$20bn in 2019, representing a 5.6% growth YoY
China as a market for US companies: Large inbound acquisitions in China have always been rare; acquisitions by US companies have mostly been small/medium sized
Impact of the trade war: Punitive actions against China will continue. Even if Trump loses in November, investors don’t expect a significant change in the US approach to China. The tone and tactics will change
Developments during the pandemic: China becomes a refuge for US companies after overcoming COVID-19. China’s economy is slowly recovering, growing by 3.2% in Q2 2020 as retail and luxury sales experience a strong rebound. The recovery is unbalanced, which has widened the wealth gap
Hong Kong isn’t over for foreign investors, despite the National Security Law: Hong Kong will remain the hub for inbound and outbound mainland investments
China M&A going forward:
- In the short term, Chinese investors will be focused on domestic consolidation and less active in outbound M&A. Growth in inbound deals is expected, but a red-hot IPO market and high valuations in China could prevent this from growing fast
- In the medium/long term, we expect frequent sales of family-owned businesses. As China faces rising tension with the US, the PRC Government work to ease regulations on inbound M&A

If you want a copy of the slides, or would like to discuss any of these topics, please contact us.

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 24 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

We spoke to Huong Trinh, Managing Director and Head of the BDA Partners Ho Chi Minh City office, about the latest exciting developments in M&A in Vietnam.

You worked on the largest inbound private sector industrial transaction in Vietnam in the last three years, the sale of Thipha & Dovina to Stark Corporation, for US$240m. Why were Thipha & Dovina such an attractive investment opportunity for an international buyer?

Thipha & Dovina are a leading electric cable and non-ferrous metal group with a 30-year history. The companies grew revenues at an average 20% per annum for the period 2015-2019, and revenue exceeded US$500m.

This asset offers direct exposure to Vietnam’s economic growth. Vietnam has been emerging as a manufacturing hub in the region given its relatively low labor cost and strategic location. In 2019, Vietnam recorded GDP growth of ~7%, and is expected to remain a regional outperformer. Significant investment in infrastructure is underway. The government and business led spending will drive demand for cable and wiring for the foreseeable future.

Thai buyers are consistently interested in Vietnamese assets, and have made several significant investments in Vietnam over the last few years.[1]

Do you think there will continue to be inbound interest in Vietnamese companies from the rest of Asia and further afield in the future? If so, what are the key reasons?

Obviously yes, as we have received lots of indications of interest for high-quality industrial assets, as well as other sectors, from both global and regional buyers. We believe the strong inbound interest is mostly driven by the following factors:

Vietnam’s economy is driven by consumer spending, which accounts for close to 70% of its GDP. With the third largest population in ASEAN, and the expansion of upper and middle-income earners, the economy is expected to grow further. Despite the disruption from COVID-19, Vietnam is expected to still enjoy ~3% economic growth this year and is expected to bounce back to 6% growth in 2021[2]
Vietnam will benefit from recently signed Free Trade Agreements (CPTPP & EVFTA), which encourage more foreign direct investment into the country and put in place lower tariff structures. This is also an indicator of strong EU-Vietnam relations
Vietnam has been emerging as a manufacturing hub in the region given its relatively low labor cost, but with increasing quality and a strategic location with many seaports nationwide. Global companies started shifting operation to Vietnam in 2010, and this trend has been accelerated by the ongoing US-China trade tensions

Are there opportunities in Vietnam for BDA to sell founder owned businesses in the future?

We believe there are still many more opportunities in Vietnam to advise founders on the sale of their businesses in the short term. There are still a lot of sizable and high-quality assets in the market that have grown into market leaders over the course of several decades and which have undergone different phases of development. They may need a new “growth engine” or investment to remain competitive and in some cases the founders are simply looking to exit and step back from the company they founded.

In addition, improved legal framework and corporate governance are making it easier and more transparent for foreign investors, giving them greater confidence to acquire majority stakes.

We are currently mandated on a number of projects thanks to: (i) a combination of our strong relationship with both strategic and financial sponsor buyers because of our global network; (ii) a senior team on the ground in Vietnam (especially important during COVID-19); and (iii) excellent execution capabilities which are laser-focused on delivering the best outcome for our clients.

Which will be the most attractive sectors in Vietnam for M&A in the post COVID-19 environment and why?

Internet-related businesses have been growing rapidly during COVID-19. Online, or online-to-offline, products and services have seen significant growth. This is not just a short-term effect; consumer behaviour is changing, and this is a long-term sustainable shift in consumer dynamics. Average order value on e-commerce sites rose by over 35 percent year-on-year in the first half of this year.

People are still spending money on shopping, a good sign given the fears that demand would fall during the COVID-19. The best performer was the groceries and fresh food, following by household supplies, homecare and healthcare products. Shopping malls are now packed with people like COVID-19 was never here.

For the industrials sector, COVID-19 has been certainly a catalyst for business owners to consider a transaction. The underlying reason was the fundamental change in the economic outlook domestically and globally, which has urged a number of investors to look for a more stable and “safer” destination whilst business owners see the benefits of having a “big brother” who is financially strong together with them to grow the business, especially during the unstable periods.

Healthcare is another attractive sector for investors. Some of the healthcare sub-sectors are performing well during COVID-19, while some are not. The sector will likely see lower cash flow in 2020 compared to 2019. Hospitals face a huge negative impact on revenue as they have had to cancel many profitable surgeries and procedures, while spending more on staffing and getting extra protection equipment for work. In contrast, personal protective equipment companies are seeing significant revenue growth, and the pharmaceutical sector will continue to grow strongly post pandemic.

Industrial real estate and logistics will also grow, thanks to multinational companies shifting their manufacturing base from China, and the requirement for logistics and supply chains to keep up.

Sectors that have been temporarily hit by COVID-19, such as food & beverage, hospitality and discretionary retailing, present opportunities at attractive valuations for buyers who are confident of a strong bounce back after COVID-19.

Do you see any changes in perception towards M&A processes in Vietnam? Have handshake deals been completely replaced by more structured processes?

Compared to a decade ago, the perception towards M&A has been changed drastically among business owners, government agencies and investors/buyers in a positive way. As Vietnam’s economy has opened up, we have witnessed more and more large deals that have brought positive growth to the target companies and benefits to all stakeholders. As awareness of the positive benefits of M&A has grown, shareholders are now more open to adding M&A as a strategic option in their growth trajectory and strategy. Sellers are becoming more educated in terms of an M&A process and key concepts. I still remember 15 years ago, it took me a lot of time to explain to the business owners how investors would value a business, which was not only based on how many land use rights the company held or how famous their company was.

For small deals, or deals between two domestic parties, handshake deals are still common, with all the decisions being made quickly, top down. However, we see people are taking a much more structured approach for medium and large domestic deals or cross-border deals. These deals will involve a variety of advisors as shareholders see the benefits of having an official process and professional advice: (i) better positioning the company; (ii) consistent and organised approach; (iii) a more competitive process will result in better equity valuation and terms; and (iv) increase the certainty of the deal completing and reduce the associate deal risks.

As BDA has a local team in Vietnam, we are happy to be trusted by local business owners to give them advice and help them to run a structured M&A process.

How do you see international investors completing transactions with Vietnam’s borders still shut?

BDA has signed and/or completed three transactions so far in 2020 without the buyers coming into Vietnam for the closing/signing.

This was a key concern when COVID-19 started, but as things have progressed, it is really a matter of how much both sides like the deal and how we, as the advisor, add value. We have been very creative with our sale processes. For example, helping the investor hire a local advisor to do the site visit/management meeting on the ground in Vietnam; arranging for the seller to take high-quality videos of the factories and assets, and so on. These creative approaches help to get deals done.

According to the AVCJ, 2019 was a record year for the number of PE / VC investments in Vietnam. Do you expect to see a rise in domestic and international private equity investment in Vietnam continuing in 2020 and 2021?

From a macro level value creation process perspective, Vietnam will continue to enjoy: (i) stable, unparalleled economic growth compared to other Southeast Asia countries, especially amid the COVID-19 situation; (ii) an influx of advantages from the recent free trade agreements; and (iii) strong government push to privatize state-owned enterprises. From a micro-level perspective, Vietnamese companies are getting more professional with stronger management teams and better corporate governance. They are more open to foreign investors as they see the different values that both strategic and financial investors can bring to the companies.

There is increasing demand for growth capital in 2020-2021. The private sector in Vietnam, with its strong momentum, will need more capital to pursue transformational changes and achieve further growth. The start-up ecosystem is seeing robust expansion, with internet related companies as the most attractive sector.

We, at the BDA Partners Ho Chi Minh City office, are seeing strong demand for growth capital and exits from both founder-backed and private equity owned companies. This is visible from our numerous live deals and strong pipeline/opportunities for 2021.

[1] In 2014, Berli Jucker Pcl announced a US$879m transaction to acquire Metro Cash & Carry Vietnam. In 2015, Central Group through its subsidiaries, Power Buy, bought 49% stake in Nguyen Kim Trading Company. In 2016, Central Group acquired Big C Vietnam, a supermarket chain, with a transaction value of US$1.0bn. In 2017, ThaiBev Group, through its subsidiary Vietnam Beverage, has acquired majority stake in Sabeco, Vietnam’s largest brewery company, with a deal size of US$4.8bn. SCG, a Thailand conglomerate, has done a number of transactions in construction materials and packaging in Vietnam.

[2] HSBC research shows Vietnam enjoying very strong internal domestic demand even during COVID-19. Nielsen research indicated that Vietnamese consumers remain 2^nd in ASEAN in terms of being positive.

About BDA Partners

Unparalleled economic disruption, a resurgence in COVID-19 cases and heightened trade tensions are stealing newspaper headlines but also mask fundamental developments in trade and investment. In this piece, we examine some of the latest market trends that are taking place in Asia and globally against a backdrop of increased economic uncertainty and geopolitical tension.

The Asian Century
The rise of Asia remains undisputed and will continue to power global GDP growth going forward. A brief glance shows unparalleled milestones:
– 50% of world GDP is expected to be Asian by 2024, and drive 40% of the world’s consumption
– 21 of the top 30 largest cities are now in Asia
– From 2000 to 2019, China increased its GDP from just over US$1trillion to US$14trillion

While 2021 will see some rebound in western economies as they emerge from COVID, this economic growth is likely to be lacklustre compared with mid and long-term growth rates in Asia.

In our latest piece, Shifting sands: changes in trade and investment in an uncertain world, the BDA team examined some of the latest market trends that are taking place in Asia and globally against a backdrop of increased economic uncertainty and geopolitical tension. We look forward to helping you make sense of these changes and navigate through uncharted waters.

Download the report

We hope you find it helpful. If you would like to discuss, please contact us:

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Simon Kavanagh, Managing Director, Hong Kong: s kavanagh@bdapartners.com

About BDA Partners

Originally published as an op-ed in the Barron’s

In the 1990s, financiers used to mock “the FILTH”: British bankers or business people who “fail in London, try Hong Kong.” If you couldn’t make it anywhere else, you could still make it om the shores of the fragrant harbor whose ever-rising tide floated all boats. Hong Kong was the Manhattan, Las Vegas, and Los Angeles of Asia, all rolled into one—money, nightclubs, fast cars, world-class restaurants, stock-market booms, beaches, yachts, and dodgy go-go bars. It was a boomtown because it was the gateway to China. This was the staging post for the greatest gold rush of the 20th century: the reawakening of the Chinese dragon. Despite the recent crackdown on civil liberties, Hong Kong is far from turning into a financial backwater. As long as opportunity still exists, it will continue to attract foreign investors who feel more at home there than on the mainland.

Expats have long preferred Hong Kong to Shanghai or Beijing. The city boasts better schools, hospitals, and espresso bars. Google still works. Unlike on the mainland, business and society has felt free. While the British had never granted Hong Kong true democracy, the rule of law was clear. Private-equity firms enjoyed a fairly level playing field, taxes were low, the press was free, and the judiciary was independent. That’s why Britain fought so hard for the principle of “one country, two systems,” which was enshrined into law, for 50 years, when Hong Kong reverted to Chinese rule. China promised to give Hong Kong the democracy that Britain had denied its colony. Of course, the truth has emerged rather differently.

Suddenly, Hong Kong is out of fashion. Riots, the Covid-19 pandemic, and Chinese government repression have combined to scare away those same expats who made it their home. Six weeks ago, China imposed a broad national-security law on Hong Kong banning secession, subversion, and collusion with foreign countries. It’s already having a dramatic effect on the city’s media and politics. The new law eliminates civil rights that local residents have long exercised, and raises the specter of foreign business people being arrested for vaguely defined offenses and being deported to stand trial in China.

Beijing, far from liberalizing, is cracking down on dissent inside and outside its borders. The new security law explicitly applies beyond Hong Kong and covers non-Hong Kong residents, making this once freewheeling city dangerous for anyone viewed unfavorably by Beijing. Growing economic tensions between the U.S. and China have also led to tariff and nontariff barriers.

Last week, more than 200 police officers raided the head office of Apple Daily, the city’s most-read pro-democracy newspaper. Several managers were arrested, including the paper’s high-profile, millionaire owner, Jimmy Lai. Lai faces an array of charges, notably collusion with foreign countries, under the new law. He has a good relationship with the Trump administration and has testified before Congress in the past.

At the same time, China is trying to reassure the world that it should still do business with Hong Kong. For the foreseeable future, the city will still be the hub for inbound and outbound mainland investment. While Singapore has gained traction with private-equity professionals, boasting a transparent legal framework and increasingly broad tax treaty, Hong Kong is countering with incentives of its own. A new Limited Partnership Fund Bill hopes to establish Hong Kong as a prime Asian destination for private-equity and venture-capital funds. The legislation proposes Hong Kong as a domicile for private equity, venture capital, and real-estate funds and will attract private funds and family offices to Hong Kong. Domiciling in Hong Kong would give these firms direct access to the region and to Hong Kong’s robust capital markets. It will be a catalyst for growth in tech and financial services.

Officials have also announced plans to introduce a new carried-interest tax scheme, expected to be one of the world’s most liberal, intended to make the city a viable alternative to the Cayman Islands, especially for Asia-focused funds. The Hong Kong government is also planning to provide extensive tax concessions for private-equity funds’ “carried interest” performance fees. Singapore offers similar advantages, but Hong Kong is aiming to be even more generous to investors.

All of this will be attractive to investors as Hong Kong is still swimming in wealth. Tycoons have outperformed almost everyone else. With a population of only 7.5 million, the territory ranks seventh in the world with 96 billionaires and a combined wealth of $280 billion, according to Wealth-X’s Billionaire Census 2020. Of all world cities, only New York can boast more billionaires.

Hong Kong is clearly now part of the People’s Republic of China and, prompted by the government, mainland money is pouring in,but there’s little sign of foreign capital fleeing. Foreign investors who want to share in China’s economic growth have little choice but to use Hong Kong’s capital markets as their main vehicle. The Hong Kong dollar has held its trading band against the U.S. dollar. The stock market has seen heavy inflows from mainland institutions, and there are more and more “red-chip” companies, based in mainland China, but listed on the Hong Kong Stock Exchange. The Hang Seng Index fell sharply in the first quarter but has recovered 14% from its March low. The index is still 9% off its peak from two years ago, yet rumors of Hong Kong’s demise may be exaggerated, or just plain wrong.

Even though China has put a harness around the neck of its golden goose, Hong Kong’s economy is too precious to kill. Vietnam and Singapore are certainly benefiting from Hong Kong’s recent woes as expats move in and fund managers direct more money into those markets. Still, as long as Hong Kong’s financial advantages remain, Western professionals and investors may find themselves back in the gleaming office towers of Hong Kong Central quicker than they expect.

About BDA Partners

Euan Rellie, BDA Co-Founder and Senior Managing Director based in New York, recently joined a unique fireside chat with three global private equity firms and the largest & most active global PE legal practice.

Panelists:

Euan Rellie, Co-Founder and Senior Managing Director, BDA Partners
Duncan Enista, Partner, Kirkland & Ellis
Andre Puong, Partner, Cathay Capital
Joanne Yoo, Managing Director, DPI
Bob Landis, Founding Partner (Origination), Riverside Company
Moderated by Jordan Selleck, CEO & Co-Founder, 51 Labs

Here are some of the key takeaways. Check out the full video for more detailed insights.

Global buyout transactions fell 60% from January to April and transaction volume is now trending around 1/3 of the five-year monthly average
Uncertainty in the US is hampering deal flow relative to other markets
Deals are getting done, but largely for add-ons and platforms known pre-COVID
Earn-outs: Not seeing a significant uptick in earn-outs; however, Duncan is seeing them as a way to get sellers back to the table when the valuations weren’t what they had hoped for during the lockdown
Hong Kong: The mood is bleak, according to Euan Rellie, Senior Managing Director at BDA. Firms are moving out and there’s a feeling that it’s quickly becoming less of the multinational hub that attracted people for decades. In the short term, tying Hong Kong closer to China might not be all bad. For example, Chinese companies which may have be reluctant to do IPOs in Western markets might favor listing in Hong Kong
China: Doing cross-border deals with China is more difficult now. Today, you have competitive local brands that are going to eat your lunch if you’re not extremely aggressive and localized. You can’t use the playbook of 20 years ago
Africa: Joanne Yoo, Managing Director at DPI, made it clear that Africa is not as connected to the rest of the world so the pandemic hit later and caused less damage. DPI’s deal activity is actually busier than before. Their portfolio companies have largely been deemed as essential businesses, and like many lower/mid-market company in Africa, they hold more inventory than other markets
What impact will the upcoming US election have on their business and strategies, based on a scale of 1-5? Joanne 2, Bob 3, Andre 3, Duncan 2, Euan 2

Latest insights from BDA:

About BDA Partners

BDA Co-Founder and Senior Managing Director Charlie Maynard talks about opportunities in the Asian M&A market and how BDA runs an excellent sellside process and delivers the best results for clients.

In this working-from-home chat with BDA senior leadership, we talked to Charlie Maynard. Charlie co-founded BDA Partners with Euan Rellie 24 years ago in Singapore and New York. He has spent many, many years in different countries in Asia before and after founding BDA. We talked about the opportunities he sees in the Asia M&A market, and how BDA runs excellent sellside processes and delivers the best results for clients.

What opportunities did you see in the Asian market when setting up BDA in 1996?

We realised that there was a gap in the market, because the big banks were talking about being interested in global M&A and how important Asia was to them, but in reality they were much more focused on Western M&A and Chinese IPOs, where the big bucks were. While we understood that Asian M&A was a tough market, but we reckoned we could build a business by entirely focusing on it.

How has BDA evolved over the years?

When we started out in 1996, we were largely a buyside shop, working for large, primarily Western MNCs looking to acquire in Asia. The buyside work was very useful in terms of helping us understand sectors and what clients wanted. For the first ten years of BDA, the sellside market and particularly the private equity buyout based sellside market didn’t really exist. But around 2006-2007 there were signs that it was beginning to take off, and that was when we made the switch to focus on the sellside which is 80% or more of our business today.

The other two big changes were a few years back when we started both to build out and focus on our six core sector expertise including Industrials, Chemicals, Health, Technology, Consumer & Retail and Services as well as to set up a dedicated financial sponsors group coverage team which would focus full time on our relationships with sponsors.

How are BDA set up to deliver the best results for clients?

To run excellent sellside deals, you need to have global reach in order to access all buyers and be agnostic as to where the buyer comes from. There are very few parties that can really access all relevant buyers, regardless of geography, and why this business that we’re selling is attractive. We are one of the very few M&A advisories who can do that.

You also need to have the sellside process nailed. We are very, very process oriented. We systemize and automate the basic bits of a sellside process, which are normally repetitive, so we can focus on the difficult, critical bits which are specific to individual transactions and help our clients as fully as possible by adding real value. This is another key differentiator that we have in terms of systems and processes compared to our peers and competitors.

What can we expect from BDA Partners for the next five years?

If you do M&A, you want to be doing sellside M&A. The growth in the buyout market over the last 5- 10 years has been enormous in Asia. And if you look at the capital that has been raised over the last 1-3 years, it’s clear what we have seen to date is only a fraction of what we are going to see in the future. It’s a huge and rapidly growing market, but because of the complexity and global reach required, there are very few advisors that can effectively service this market. Sellside M&A advisory will remain our core business and we’ll continue to focus on raising our deal size.

Beyond that, we started to get involved in debt advisory and restructuring by a partnership with Zerobridge, as well as trying out principal investing with BDA Capital Partners. There are quite a lot of exciting opportunities for other avenues of growth in addition to the core M&A business.

What have been the biggest challenges in BDA’s journey so far?

The hardest challenge has been creating the global network we have today, where each person in each office can deliver much more than they are able to do individually. This has taken a lot of time and it is completely and utterly about the people inside BDA. It’s ever evolving and must always be improving and progressing through our team efforts. Keeping the team moving forward and focused across nine different offices and 12 different time zones will always be challenging.

What are you most proud of about BDA?

It is the team that has created this seamless global network that allows us to deliver the best results for our clients. I love our team and I love our team spirit. Very, very few organisations have as diverse and international a team which truly works together in a fast, coordinated and intelligent way. I love the fact that we have so many people from so many countries liking each other and enjoying working as a team – and that this teamwork delivers great results.

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Latest insights from BDA

About BDA Partners

BDA Partners has a long track record of completing complex cross-border carve-outs. As one of the most active M&A advisors in Asia, we complete several carve-outs for clients each year. We share our insights below on how to complete a cross border M&A carve-out transaction successfully.

Carve-outs are a growing feature in the current M&A deal market for multi-national corporations (“MNCs”) and financial sponsor-backed companies, particularly as CEOs and shareholders assess non-core segments and assets and look to improve financial return metrics.

Acquiring a carved-out business is attractive. Significant value can often be created through margin improvements and revenue / cost / operational synergies with the new owner. Carve-out transactions require buyers who are experienced with reviewing, diligencing and identifying the value-add opportunities, and have an experienced investment team to implement changes from day one. These criteria make financial sponsors ideal acquirers of carved-out businesses. The growth in dry powder with private equity funds, estimated at US$830 billion for buyout funds at December 2019[1], is increasing deal volumes and competition between private equity funds searching for acquisitions to put committed equity to work. This in turn is having a positive impact on the valuations MNCs can realise.

During the current COVID-19 pandemic, we see management teams and shareholders using this time to identify any non-core segments and assets which could be carved out in the future; either to raise cash to improve liquidity; or as part of a wider restructuring of the Group. If the potential carve-out is not urgent due to a distressed financial position, this time during the COVID-19 pandemic is being used to assess and plan for future carve-out transactions when local and global economies begin to recover.

Carve-outs are not for the faint of heart. They present the seller with a range of complex, time consuming and potentially challenging deal hurdles from day one. Deal complexity arises from company business operations including international subsidiaries, logistics, procurement, HR, back office functions and IT systems, resulting in an array of deal challenges. No carve-out deal is the same, which means customised solutions will be needed to bridge the needs of the buyer and seller of each deal. Early preparation with an experienced financial advisor is critical in order to avoid potential pitfalls.

Being poorly prepared for a carve-out can have a major impact on the chances for success. Poor preparation or neglect of key areas may jeopardise the transaction itself, and will certainly:

Increase scope and time of buyer due diligence
Lead to value mismatch between the shareholders and the buyer
Damage potential post deal synergies
Impair post transaction relationship with the seller where Transitional Service Agreements (“TSAs”) are required

We believe there are a number of common themes and actions which can be considered to help address these risks and challenges of completing a carve-out transaction, and ultimately increase the likelihood of successfully completing the transaction.

Appoint experienced external advisors as early as possible

Areas of deep complexity and risk include standalone financials, legal risk and integration planning / implementation with the new owner, employee transfer and shared IT/compliance. In advance of a process we recommend appointing a financial advisor and other sell-side advisors to help manage the process in a disciplined approach. This would include a Big 4 accountancy firm and a legal firm as a bare minimum, but IT and HR advisors may also be needed. Advisors who have past experience in carve-outs will help maximise value and provide confidence to buyers about the carved-out business they want to acquire.

Identify the carve-out business senior management team early

The senior management team of the carve-out business needs to be identified and aligned with the carve-out transaction and strategy early in the process. The potential buyers will need to meet and hear the management team discuss the business early in the process and give the buyer confidence about the carved-out business they are looking to acquire, including the short-to-medium term strategy and growth opportunities.

To ensure the management team are aligned and motivated, the seller should ensure there are transaction and retention bonuses in place as part of the sale process. This will motivate the senior management team to get the deal done, but also provide confidence to the buyer they will inherit a senior management team that knows the business inside out and will drive the integration and growth plans from day one.

To the extent there are full time employee (“FTE”) gaps in the senior management team being carved-out, it is best to be upfront and communicate this early in the process to the buyer, so they are aware the positions which need to be filled on day one. However, the costs for such unstaffed positions, should always be included in the historical and forecast financials.

Finally, if needed, the seller should bring in dedicated cross departmental support as part of the sale process to help buyers understand a particular area if not covered by the senior management team. For example, the seller may have a Group Head of IT who is not transferring with the carve-out transaction, but they will be important for educating the potential buyers on the IT framework / systems in place.

Prepare a “what’s in, what’s out” analysis

Early in the sale process, the seller along with external advisors should prepare a detailed “what’s in, what’s out” analysis setting out all the assets including real estate, contracts, back office / IT services and people by entity / location that will be included in the transaction perimeter. This exercise is fundamental to complete early in the sale process as it will dictate how you approach preparations of the historical / forecast financials and how you sell the equity story to potential buyers as you take the carved-out business to market. If this analysis is detailed, thorough and well thought through, it will give buyers confidence about the business they want to acquire. This analysis will help identify any services such as IT, finance, procurement, contracting, etc. that might need to be covered by a TSA on day one.

Prepare the standalone financials

Once the “what’s in, what’s out” analysis is completed, the preparation of the financials will be somewhat easier. To the extent possible, the financials should be prepared and presented with the buyer and its due diligence in mind. For example, the financials should be split by key segment, geography and even a customer / products / services / SKU level, if possible.

You should ensure that the carved-out financials have all the costs required to run the business on a standalone basis from day one, post carve-out. For example, if a sales or finance person previously spent 50% of their time working for both the carved-out business and the parent group, then you should include the costs for one full FTE and not a half FTE in the carved-out financials. This will be a key focus of due diligence for a buyer, so it is important standalone costs are detailed and well thought through.

In the current COVID-19 environment, forecasting the financial performance of the carved-out business will be inherently challenging and difficult to set out accurate and reliable assumptions. Time should be taken to assess the impact of financial forecasting under COVID-19, and if needed, you should delay the process until the financial forecasts can be modelled accurately with solid underlying assumptions, and when the local / global economies have stabilised.

In our experience, the carve-out financials and operating model are certainly the areas where clients believe there would be significant room for improvement if they could start the sale process again.

While this may appear straightforward, accumulated habit and internal company shared resources may give a false impression of true standalone costs and requirements. Deep review and analysis are required to verify the completeness and accuracy of the standalone accounts.

Prepare the equity value add story for a new owner

There will be a fundamental reason why the MNC or private equity fund wants to divest the carve-out business, and this could include being a non-core business, lack of senior management focus, lack of investment, better management of asset portfolio, or struggling financial performance in the face of market competition. It is critical to tell the equity story to the buyers as to why it is a great business to own and how under the right owners, the business has great growth opportunities and can create significant value for the new owner. This could be achieved through investments in new plant & equipment, geographical growth, product development, or from positive market forecasts. If required, consider engaging commercial due diligence providers to prepare a report to help tell the market story.

Legal, tax and jurisdiction complexities

The legal aspects of a carve-out transaction tend to be one of the more complicated areas. This is largely associated with how to separate the in-scope legal entities (or assets) from the wider Group, along with how to legally separate customer & supplier contracts, IP, fixed assets and employment contracts. Critical assets or employees may fall out of the perimeter of the carve-out and may need to be re-assigned to the carved-out entity before or on closing. There may also be change of control clauses in customer, supplier or lender contracts which need to be communicated. Furthermore, there may also be tax implications for the seller or the carved-out business from the carve-out, and if so, internal or external tax advisors should be consulted.

As the business is being carved-out from a wider Group, it is likely there could be legacy issues or provisions from the prior owner or day-to-day operations, such as legal or environmental provisions. Assessing these legacy issues early in the process can help to prevent further value erosion from material debt-like items.

For a successful outcome of the transaction, to preserve value and provide protection to the seller, it is crucial that the Sale and Purchase Agreement (“SPA”) is prepared early and sufficient time is provided for sell-side and buy-side lawyers, consultants, and investment professionals to negotiate and share the mark-ups back and forth. Furthermore, schedules to the SPA should be added which set out the assets, customer & supplier contracts, and IP for example, that will be included in the transaction perimeter.

Finally, it is crucial to have the TSA designed, planned and fully costed for immediate implementation. Drafting should begin early, with a draft TSA in the dataroom, as part of the buyer’s due diligence will be understanding how quickly and challenging the separation transition period will be, and what the associated costs, penalties, services provided, and performance reporting are. There will be significant additional one-time start up transitionary costs to be borne by the buyer and seller in preparation and implementation of the TSA.

Despite rigorous preparation for a corporate carve-out, flexibility is needed by both buyer and seller to arrive at an agreement. TSAs may include sharing of commercially sensitive information, IT infrastructure, expose the seller’s customers to a new party in the form of a buyer, and lead to potential legal ramifications if handled poorly. A well-designed and managed process will build trust which is the essential ingredient to achieve agreement.

If you would like to discuss carve-outs further, or if you are considering a carve-out transaction, please reach out to any of the BDA Partners team members listed below.

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Ruari Sinclair, Vice President, London: rsinclair@bdapartners.com

[1] Bain Global Private Equity Report 2020

About BDA Partners

While there has been broad discussion on how businesses and markets have responded to the coronavirus outbreak and how they will adapt to a post COVID-19 world, arguably, no industry has received as much attention as clinical diagnostics. With the heightened focus on testing, terms such as antibody test and nasopharyngeal swap have jumped from medical journals to the front pages of newspapers the world over.

Thanks to previous experience with SARS, Asian IVD companies in many cases have led innovation in combating SARS-CoV-2. Regulators worldwide are closely studying the rapid response and mobilization of testing resources seen in China and Korea at the outset of the pandemic. However, even with the situation stabilizing in East Asia, companies in the region continue to innovate – developing more rapid point-of-care tests and antibody testing platforms, not to mention the urgent research into a possible vaccine being led by companies like CanSino and Shenzhen Geno-immune in China, Bharat Biotech in India, SK Biopharma in South Korea, and Takeda in Japan, to name only a few examples.

While the response to the pandemic has lifted the valuations of diagnostic tools and technologies companies globally, Asian companies have been trading, on average, at over 30x trailing EBITDA, led primarily by premium valuations achieved by Chinese diagnostic tools companies. We expect the spike in valuations will create opportunities in the space and accelerate consolidation efforts in the region, especially in China where the IVD market is less concentrated and the rise of import substitution in the diagnostic products space has attracted increased investment from both healthcare companies and firms in other industries looking to capitalize on the trend.

While year-to-date M&A activity has been muted across all industries, BDA and our partners William Blair continue to participate in deal activity in the diagnostics space, including the recently announced sale of FountainVest’s stake in Chinese IVD business Shanghai Kehua Bio-engineering in China and the sales of Stratos Genomics to Roche and of Exalenz to Meridian Biosciences in the US and Israel, respectively. We have also seen significant capital markets activity in the diagnostic tools and technology space so far this year.

In many ways, the coronavirus pandemic has accelerated a growth trend already taking place in Asia. Thanks to a focus on preventative care to reduce healthcare costs and the increasing prevalence of diagnostic testing, the Asian IVD industry had been poised to achieve double-digit growth over the next five years, even before the first cases of COVID-19 were reported.

While it could be argued that the impact from COVID-19 on the diagnostics space will be short-term, BDA has seen an interesting dynamic emerge where demand for more routine test kits, such as flu tests, have fallen due to COVID-19. We expect this will be temporary and not dampen mid-term demand. If anything, the pandemic has triggered increased spending on development that will spur further innovation for years to come.

Download the full report

Contact BDA healthcare team

Andrew Huntley, Senior Managing Director, Asia/Europe: ahuntley@bdapartners.com
Lei Gong, Managing Director, Shanghai: lgong@bdapartners.com
Kumar Mahtani, Managing Director, Mumbai: kmahtani@bdapartners.com
Peter Moreno, Vice President, New York: pmoreno@bdapartners.com

Related content

COVID-19: Impact on opportunities in the China health sector

About BDA Partners

The COVID-19 pandemic has already caused significant damage to the global economy. All markets and sectors have been affected. Asian countries are working with some success to revive their economies, and to begin to loosen lockdowns across the region, although we have seen numerous setbacks.

The pattern today feels like two steps forward, one step back.

Technology and the practices developed in past pandemics have enabled governments to track potential infection cases, trace their close contacts, and quarantine all affected individuals to stop the virus from spreading in the community. Singapore’s contact tracing application, TraceTogether, uses Bluetooth technology, as does Australia’s COVIDSafe app. South Korea’s drive-through testing centres have enabled testing for large sections of the population. In China, the government has used a combination of QR codes, colour-coding, and the ubiquitous Alipay and WeChat apps to track and permit healthy travellers.

Several Asian countries, including China and South Korea, have experienced an uptick in cases sometime after restrictions were eased. In several instances, authorities have re-imposed measures to restrict interactions between citizens, to fight secondary spread of the virus.

For most of the past month, China has reported very small numbers of daily new cases, most of which were “imported”. In recent days, the Chinese government has found new local clusters in cities including Wuhan and Shulan. The global press has been sceptical as to the true number of China cases, but the country has taken dramatic and extensive steps to regulate and monitor all its citizens so businesses can largely return to work. Businesspeople are now able to travel around the country via cars, trains, buses, aeroplanes, etc.

South Korea managed to lower the number of new cases without fully locking down its economy. Instead, the South Korean government responded quickly to ramp up testing capacity and aggressively trace and isolate every potential case.

In Japan, Prime Minister Shinzo Abe has extended the nationwide state of emergency to 31^st May. Japan’s Economy Minister Yasutoshi Nishimura has said the declaration will be lifted in many regions outside Tokyo, this week.

Singapore’s citizens will soon be able to get a haircut and visit bakeries, as the government loosens restrictions slightly. Despite an upsurge in cases due to an outbreak among foreign construction workers in crowded dormitories, transmission in the local community has dropped. Singapore has reported 26,000 infections, the most in Asia, after China, India, Pakistan and Qatar. But it has a low fatality rate, with only 21 deaths.

As of 12^th May, Vietnam has, according to official statistics, still suffered no deaths from the virus, and has limited total infections to just 312, despite its shared border with China, and its role as a popular regional holiday destination. Vietnam has managed a rigorous pandemic control strategy including extensive structures of control and tracking via mobile phones.

Despite rising numbers of COVID-19 cases, both India and Pakistan are loosening their strict lockdowns, hoping that deaths will remain low and their hospitals will be able to cope with the serious cases. The surprisingly low level of South Asian deaths so far, may signal a milder pattern to the disease outbreak, which has convinced authorities the economic harm of extended lockdown is not justified when set alongside the apparently manageable health risks. Official statistics in both countries show a relatively low level of infections to date, but analysts suggest that a growing number of infections may be lurking undiagnosed.

We see many bright spots in key BDA markets.

Financial sponsors have been resilient and quick to act. Initially they performed triage on their existing portfolios, but already they are beginning to explore new growth opportunities including looking at prospective acquisitions. Global sponsors have been particularly aggressive in Japan, with local government support. Notably, Bain Capital has acquired Showa Aircraft Industry and Nichii Gakkan. Private equity firms are increasingly looking at take-privates and PIPE transactions.

As in all downturns, we see the strongest and best capitalised, most differentiated players, as benefitting and often growing market share aggressively. Tech-enabled businesses, and those which sell online, have become markedly more successful.

We see some price dislocation, slowing the progress of deals: sellers do not want to accept a significantly lower price, but buyers are looking for bargains. Realism is seeping through, and the most sophisticated players are looking beyond the crisis. Stock markets have bounced to some extent off their low.

We are seeing some distressed seller activity, and evidence of business groups looking to sell certain assets via carve-outs to generate cash or refinance existing debt facilities.

Life goes on, for now, in the new abnormal.

Notwithstanding lockdowns and social distancing, BDA is succeeding in helping clients to close transactions. Buyers are hiring third parties to carry out site visits, to be their eyes on the ground, when the buyer is unable to travel. Management presentations are being done virtually as video conferences with Microsoft Teams and Zoom. BDA is proud to have advised on transactions involving India, Vietnam, Thailand, China, Germany and the US in the last two months:

We have been monitoring each sector and geography, working to provide timely insights to help our clients understand and weather the storm.

We have published the following reports which you may find useful:

BDA has a track record of providing high-quality M&A advice, over 24 years. We have built scale, focus and connectivity between sellers and buyers across Asia, and worldwide. We will continue providing premium, Asia-related advice to clients globally, to achieve the best transaction outcomes – including walking away from deals which don’t make sense.

We are available at short notice to discuss what we are seeing, and how we can assist with your strategies and potential transactions.

We trust that you and your families are staying safe and healthy. We are operating well, across all our offices, and from our homes. We are confident we are well placed to help our clients achieve their goals during the rest of this year and beyond.

Please let us, or our senior colleagues, know if we can help you in any way.

Euan Rellie, Charlie Maynard, Andrew Huntley and Paul DiGiacomo

Senior Managing Directors
BDA Partners