Potential China Private Equity Consumer Investment Themes 2010

Jan 2010 Version 3.0 by KC YoonPROPRIETARY & CONFIDENTIAL

“China Private EquityConsumer-Driven Investment Themes”

Jan 2010

Version 3.0 by KC YoonPROPRIETARY & CONFIDENTIAL

China Private Equity– 2010 and Beyond ..Driven Investment Themes”

Jan 2010

Jan 2010 Version 3.0 by KC Yoon

Presentation Outline

China weathers crisis well and emerges with stronger economic foundations

Funds flow into domestic economic sectors

Key Consumer Trends and Potential Investment Themes

ONE: Domestic Brands Going Nation-wide

TWO: Internet Changing the Traditional

Business

ONE: Strength in domestic

consumption

TWO: Broad-based drive for Domestic PE

THREE:

fundamentals

Government taking active role to promote Private Equity investments

Other

Fund

Other Trends:

PIPE/RMB Fund

Version 3.0 by KC Yoon

China weathers crisis well and emerges with stronger economic foundations

Funds flow into domestic economic

Key Consumer Trends and Potential Investment Themes

TWO: Internet –Changing the Traditional

Business

THREE: Govtfocused on

fundamentals

FOUR:

competition

FOUR: Increased

market competition

Government taking active role to promote Private Equity investments

Maturing PE Market

Global Trends impacting

China

THREE: Changing Lifestyle of Middle-class

China


2009 Recap: Macro-Factors Driving China’s Future Consumer Economy

3

Growth of Chinese Middle-Class

Urbanization and Growth of Cities

Growth and Impact of the Internet

> 200 Cities with >1M residents

By 2015, >300M lower-middle class; 100M

luxury consumers

NOW >300M users; >RMB 120B online consumer

sales

Demand for Housingrelated products and

Demand for lifestyle & convenient services

Demand for better

Most widespread media

class consumers

Growth of B2C


Factors Driving China’s Future Consumer Economy

Demand for Housing-related products and

services

Demand for lifestyle & convenient services

Demand for better healthcare

Over 110 high-consumer potential cities with 34% of

GDP

Most widespread media- access middle-

class consumers

Growth of B2C

IKEA continue to open 2 stores/year

Sunning plans a B2C site

Korea SKTelecom to invest RMB500M in qingxuan its

B2C site

Preident 7-11 to open3-7 stores in Shanghai plans

for 300 stores in 3yrs

China Chain Nepstar drugstar opem/acquire 700

stores 2008, plans 3000

Letao to open largest online toy store in China

Sunning plans 500sqm stores in the rural areas

targetting for 3000

Retailers continue to

expand network


2009 Recap: Key Consumer Trends with Investment Potential

+ 1




Govt Stimulus

3


2009 Recap: Key Consumer Trends with Investment Potential

“City-Living” Consumer Services

“City-Living” Consumer Services

Affordable Luxury for the Young

Affluent

Affordable Luxury for the Young

Affluent“Mass Market” + “Good Enough”

Products

“Mass Market” + “Good Enough”

Products

Online Consumer Brands

Online Consumer Brands

“Knowledge” Services

“Knowledge” Services

“Health”+ “Well-being” Services“Health”+ “Well-being” Services

Large Market

Criteria for Strong Investment

Potential

High Growth

Able to Sustain Good

Margins

Defensible Niche

+“GREEN”

Global trend

+“GREEN”- Increasingly

important Global trend


Recap 2009: Investment Ideas

Right Strategy=WinningFund

Niche “Luxury” Brands

“Quick Fashion”-shows ready market for “affordable” luxury targetted at the mass market;

Retail Chains in Inner Cities

Retail chains in 2nd/3rd tier cities where growth potential is high and

also target for M&A by larger players

Emerging “luxury” brands in jewellery, cosmetics & ladies accessories (Unique hairpin retail combined with

strong service element)

Online Consumer/Ecommerce

Services

Education Services

Affordable “Luxury” + “Mass Market”

“Online ecommerce and other services will continue to grow as China becomes leading interent

nation”

Profitable and high growth segments in K12, English Education & Adult

Education (IT& Vocational Training)


Recap 2009: Investment Ideas

-Success of ZARA shows ready market for “affordable” luxury targetted at the mass market;

Retail chains in 2nd/3rd tier cities where growth potential is high and

also target for M&A by larger players

Emerging “luxury” brands in jewellery, cosmetics & ladies accessories (eg. Unique hairpin retail combined with

strong service element)

“Online ecommerce and other services will continue to grow as China becomes leading interent

nation”

Profitable and high growth segments in K12, English Education & Adult

Education (IT& Vocational Training)

Jan 2010


2010 :Same 3 Core Drivers but with New Focal Points




3

Broader Consumer base

Broader Consumer base

2nd/3rd Tier Cities New Growth

Areas

2nd/3rd Tier Cities New Growth

Areas

Mobile Drives New Needs

Mobile Drives New Needs

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2010 :Same 3 Core Drivers but with New Focal Points


Investment Theme 1 : Domestic Brands Going National Consolidation & M&A & Development of Market Leaders


Factors Supporting & Driving Consolidation

Factors Supporting & Driving Consolidation Sectors Impacted Sectors Impacted

EXPAND RETAIL REACH: Strong brands targeting to reach inner cities/grow from regional to national

network quickly

MULTI-BRAND/PRODUCT/SERVICE PORTFOLIO: Decreasing growth rates from existing

brands/products- need new revenue drivers

FRAGMENTED MARKET SEGMENTS: where there are no clear market leaders with significant market

share

THIN MARGIN MARKET SEGMENTS: profit margins are thin and economies of scale are critical

FOREIGN INTEREST IN DOMESTIC MARKETS: where foreign retailers bring edge in management know-how & technology or acquire domestic brand

into portfolio

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Investment Theme 1 : Domestic Brands Going National -Consolidation & M&A & Development of Market Leaders

Market Activities Observed Market Activities Observed Sectors Impacted Sectors Impacted

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PE investment in mobile retailer FunTalkto acquire 6 regional distributors tobecome No.1 distributor/retailer of Mobilephones in China before listing onNASDAQ

Tsingtao acquisiitionof Ji’an brewery toconsolidateShandong market

Listed Chinese Education service playershave begun M&A (Chinacast acquisitionof 2 universities; Noah acquisition ofLittle Star children education) in order todevelop national footprint & diversifyservice lines


Investment Theme 1: Potential Investment Targets

Leading regional brands in cosmetics, personal care, Food &

drinks, fashion wear, etc

Leading Niche Domestic Brands with Strengths in

Growing 2nd /3rd Tier Markets

Regional Retailers/ Services with Strong

2nd /3rd Tier Distribution Network

• Dabao domestic personal carebrand acquired by P&G forUSD300M

• Regional fashion sportswear brand

Supermarkets in inner cities, restaurant & food service chains,

etc

•Fujian-based supermarketdominates 2nd/3rd

operates at highermargins

• KungFu Catering investedVCs



Regional Retailers/ Services with Strong Tier Distribution Network

Strong Brands with Nationwide Potential currently limited by distribution reach

Supermarkets in inner cities, restaurant & food service chains,

etc

supermarket retail chaintier cities and

higher-then industry

invested by leading

Larger well-established brands or global brands that has potential to

be national market leader

• Burberry – franchised operations inChina acquired by parent brandrecognizing strong market potential

• Ladies shoe brand retailer withstrong product but growth cpr toindustry peers limited by lack ofexpansion funds


Investment Theme 2 : Internet+ Technology Led Growth of New Niches from Traditional


Factors Supporting & Driving GrowthFactors Supporting & Driving Growth Sectors Impacted Sectors Impacted

EXPAND BRAND REACH: extensive reach of internet + mobile into young consumers help to

rapidly build brand awareness

IMPACT OF SOCIAL INTERNET : peer opinions on brands, products, etc can influence consumer

behaviour

IMPROVING TRANSACTION INFRASTRUCTURE: efficient online payment systems + low cost

delivery drive transaction increase

SHIFT IN VALUE PROPOSITION : may often result in creation of a new business service/model

INTERNET & TV DRIVES NEW CONSUMER RETAIL CHANNEL : allows consumer access to new brands

& products+ brands nationwide reach

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Investment Theme 2 : Internet+ Technology Led Growth of New Niches from Traditional

Market Activities Observed Market Activities Observed Sectors Impacted Sectors Impacted

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Explosive growth seen in online retailespecially clothing which by 2009 has capturedRMB2.4 billion or 9.7% of total clothing retail.VANCL founded only in 2007 & invested byleading VCs SAIF, IDG is the market leader with24% market share



New Business Models resulting from internet + mobile + other

New retail channels with nationwide reach at low cost

• Hunan TV & Taobao launching TVHome shopping channel to targetlucrative & growing market

Sales of China’s TV Shopping will reach

RMB 20billion in 2008

Innovative new retail channels leveraging new media

(internet/mobile/digital TV)+ supporting infrastructure

• Mobilegrowth

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New Business Models resulting from internet + mobile + other value proposition shifts

•

•ALIMAMA is a micro-ad exchange & micro-retailsite targeted at consumers•ALIMAMA is a micro-ad exchange & micro-retailsite targeted at consumers

Mobile content download retail service as a result ofgrowth of mobile users and obstacle to access content

Propriety Customer Interface + Attractive

Retail Kiosks + Professional Service

Mobile ContentProviders

Mobile Mobile Operators/

Mobile Retailers


Investment Theme 3 : Changing Consumer Lifestyle of China’s Urban Middle


Factors Supporting & Driving GrowthFactors Supporting & Driving Growth Sectors Impacted

ENJOY GREATER LEISURE & ENTERTAINMENT: affluence drives consumers towards spending

more leisure time

SPENDING ON CHILDREN NEEDS: greater affordability to spend on “single” child

FOCUS ON SELF-IMPROVEMENT & PERSONAL IMAGE: range of consumer-focused services from beauty-care, adult education, sports coaching, etc

DEMAND FOR STATUS with increased affluent also demand association with luxury brand/service

FOCUS ON HEALTHY LIFESTYLE: drives demand for healthcare products/services, sports services


Investment Theme 3 : Changing Consumer Lifestyle of China’s Urban Middle-class

Market Activities Observed Sectors Impacted

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Pearson acquisition of China’s WSI-leading English learning school

Sequoia’s investment into China’sleading animation company as demandfor cartoon/animation content grows

Estimate 8m Chineseplay tennis withpenetration in urbanareas increasing.Currently lack of tennisfacilities hamperinggrowth of sports


Investment Theme 3 : Potential Investment Targets

Lifestyle & entertainment value chain, Niche-domestic luxury product/services

Niche Luxury-products lifestyle services

• Invest in content creation/animation companies

• Family-focused Chinesehistory-based themedretail/entertainment venues;

• Regional cuisine themedFood service

Healthy lifestyle + family-focused entertainment

content & services

• Home-grown fashiondesign houses

• Beauty/spa chain offeringtraditional Chinese cures &treatment

• Tennis Academy


Investment Theme 3 : Potential Investment Targets

Healthcare products, medical service & pharma retail

creation

Chinesethemed

themed

Family/Home use healthcareSupplements & equipment

Medical service retail & hospital services

• Family-use homehealthcare check-up devices

• Leverage on Govt drive toimplement rural healthcarenetwork


Potential Investments Targets Across Core Themes

ONE: Domestic Brands Going Nation-wide

TWO: Internet –Changing the Traditional

Business

THREE: Changing Lifestyle of Middle-class

China

Lifestyle/ Entertainment Services Delivering Innovative Service

leveraging internet/mobile

technology


Potential Investments Targets Across Core Themes

Lifestyle retail brands leveraging offline +online

presence to extend brand presence &

nationwide

Lifestyle/ Entertainment Services Delivering Innovative Service

internet/mobile

Fund InvestorCompany

PE Investments in China’s Retail & Consumer Sector in 2009

Value


Sector CompanyInvested

Fund/Company

Consumer Food Products- Infant Milk

Powder

Yashili Group , Guangdong

Carlyle

Consumer Food Product- Dairy

Modern Dairy, Anhui KKR

Consumer Fashion Brands

- Ladies Shoes

Daphne International (HKSE)

TPG

Consumer FoodService-

Restaurant Chain

Golden Han Restuarants

Unknown

Consumer Fashion –Hair Accessory Retail

Guangzhou Meishan Legend Capital

Electronic & Appliance Retail

GOME(HKSE)

Bain Capital

Consumer Retail-Supermarket Retail

Wumart Inc(HKSE)

TPG, Legend & Hony

Remarks

PE Investments in China’s Retail & Consumer Sector in 2009

Value


Fund/Company

Remarks

Carlyle Group • 17.3% for between USD100-200M• Intention to build industry leader in growth market

with strong 2nd/3rd tier city distribution

KKR • Minority investment• Intention to grow market leader with large scale

modern farming technology

TPG • USD80M for minority stake• Market leader in value lady shoe segment

Unknown • 30% for USD42M

Legend Capital • USD10M for minority stake• Fast growth & high margin fashion accessory retail

Bain Capital •18% stake for USD430M• Value-add to improve management efficiency in

China’s largest player

TPG, Legend & Hony Capital

• USD212 for 11%

Fund InvestorCompany

M&A Transactions in China’s Retail & Consumer Sector in 2009

Value


Sector CompanyInvested

Fund/Company

Acquisition by domestic companies

Consumer Food Product-

Instant Noodles

Beijing Wugaodaochang

Food

COFCO

Consumer Retail-Sportswear Retail

Dalian DongzhijieSports

PouInternational

(HKSE)

Consumer F&B-Beer & Brewery

Ji’An Beer Group Tsingtao

Retail Supermarket Times, HK-based Supermarket chain

Wumartlargest

Education- Little New Star Education

Noah Education

Cross-border acquisitions

Consumer Food Service-

Food Service Chain

Little Lamb Hotpot(HKSE)

YUM Inc

Education-English

Wall Street English Pearson PLC

Consumer Fashion Brand-Apparel

Shanshan Group Itochu

Remarks

M&A Transactions in China’s Retail & Consumer Sector in 2009

Value


Fund/Company

Remarks

COFCO • 100% for USD16M• New product line which will benefit from COFCO’s

large distribution

Pou ShengInternational

(HKSE)

• 70% for USD122M• Acquisition to access over 440 new distribution

POSs

Tsingtao Brewery • 100% acquisition for USD37M• Consolidation of Shandong beer market

Wumart, Beijing’s Supermart

• Majority stake for ~USD560M• Acquisition of management knowhow & operations

technology

Noah Education •100% acqusiition for USD113M• Gain revenues & new market reach

YUM Inc • 13.9% stake• Expansion of domestic-brand food service portfolio

in China

Pearson PLC •100% acquisition for USD145M• Pearson building domestic business presence

Itochu (China) • 28% for USD111M• Build domestic business


Other Notable Features of China PE Transactions in 2010

Deal Sources

Include investments into underlisted consumer/retail entities (

with objective to add expansion capital &

Exits through Trade Sale

As market leaders build market share & consolidate market, opportunities to exit

investments in smaller brands/companies by identifying potential strategic portfolio

owner in trade sale

Jan 2010 Version 3.0 by KC YoonVersion 2.0 by KC Yoon

Other Notable Features of China PE Transactions in 2010

Include investments into under-valued listed consumer/retail entities (eg. SGX)

with objective to add expansion capital & drive

As market leaders build market share & consolidate market, opportunities to exit

investments in smaller brands/companies by identifying potential strategic portfolio

owner in trade sale
