GINKGO TREE ADVISORS FOCUS

CHINA'S OUTWARD FOREIGN

DIRECT INVESTMENTS INTO GERMANY  

2014 CHINESE M&A TRANSACTIONS IN GERMANY

                               

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This publication was compiled using the following sources and materials: Front cover picture purchased under license from istockphoto. Name: ginkgo leaves in forest; ID:13030440 Content sources: 2014 United Nations Conference on Trade and Development (UNCTAD) World Investment Report (WIR); incl. most actual data: 2013 2014 Deutsche Bundesbank, Auslandsdirektinvestitionen in Deutschland; incl. most actual data: 2012 2014 Statistical Bulletin of China's Foreign Direct Investments, MOFCOM; incl. most actual data: 2013 2014 M&A transactions were compiled by the author using the following sources: Reuters, Deloitte, DB Research, JUVE, Company/Advisor Press Releases, Own Research FDI theory: compare theories and research of John Dunning. All data depictions and charts by Ginkgo Tree Advisors UG. All rights reserved. In order to allow a general data comparison of Chinese foreign direct investments (FDI) in a global context, data by UNCATD is used in this publication. Since FDI is recorded differently in each country according to its statistical system, the publication thereby also tries to achieve uniformity. Data sets of MOFCOM, the Chinese ministry of commerce, tend to understate FDI figures compared to data from other institutions and countries. Most current FDI data obtained by Deutsche Bundesbank was published in 2014 for the year of 2012. Therefore, this data was only used for analysing regional distribution of Chinese FDI in Germany. The terms "outward foreign direct investments" and "foreign direct investments" are used simultaneously in this publication and both terms are abbreviated as "FDI" in here. USD = US-Dollar; EUR = Euro.

GINKGO TREE ADVISORS FOCUS is a publication of knowledge and perspective-sharing articles by GINKGO TREE ADVISORS. Topics include corporate strategy, internationalization strategy, M&A and Private Equity with a focus on China and Europe. GINKGO TREE ADVISORS FOCUS is published in German, English and Chinese. Authors include partners, employees and external sector experts of GINKGO TREE ADVISORS. The articles contained in the GINKGO TREE ADVISORS FOCUS publications do not necessarily represent the views of GINKGO TREE ADVISORS. We welcome any comments and feedback in regard to this publication, which you can direct to: Ginkgo Tree Advisors UG Email: info@ginkgotree-advisors.com www.ginkgotree-advisors.com Published: 15. December 2014 © 2014 Ginkgo Tree Advisors UG

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MOTIVATIONS AND TRENDS IN CHINA'S FOREIGN DIRECT INVESTMENTS INTO GERMANY 2014

GINKGO TREE

ADVISORS FOCUS

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§ China's outward foreign direct investments (FDI) surpassed USD 100 billion in 2013, from only USD 830 million in 2000

§ Chinese FDI flows are now amounting to 7% of total global FDI flows (Germany 4%) § China's greenfield FDI projects remained stable in value, the volume of global Chinese M&A

transactions increased immensly in 2013

§ China M&A transactions in Germany: 30 transactions in 2014 with a value of over EUR 1.7 billion § Main motivations of Chinese investments in Germany are strategic asset-seeking incl. technology-

seeking as well as market-seeking FDI

§ Top 5 destinations for Chinese direct investments are Hesse, Bavaria, Hamburg, North-Rhine Westphalia and Lower Saxonia

§ North-Rhine Westphalia remains Germany's China hub, potentials for other regions remain strong

 

SUMMARY

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China's outward foreign direct investments, 1990 - 2013 (USD Dollar billion) Source: UNCTAD WIR 2014

Fig.: Ginkgo Tree Advisors

The figure above shows the rapid evolvement of Chinese FDI and its essential non-existence before the year 2000. China's outward foreign direct investment flows increased from USD 830 million in 2000 to over USD 101 billion in 2013. What began with direct investments mostly into Hong Kong, neighboring South East Asian economies and tax havens like the Cayman islands or British Virgin islands has shortly after leaped into Africa after the 2006 Africa-China Summit and Eastern Europe as a forefront to industrialized market economies such as Western Europe and the US. The global financial and economic crisis only slowed China's outward foreign direct investments for a short period of time, at all times remaining stable. China is on a good way to double its FDI since 2008.

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20,0!

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120,0!

1990! 1992! 1994! 1996! 1998! 2000! 2002! 2004! 2006! 2008! 2010! 2012!

THE DEVELOPMENT OF CHINA'S FOREIGN DIRECT INVESTMENTS

China has invested more than 100 billion USD abroad in 2013, increasing its share of total global FDI flows from almost zero to 7%. It is continuing its expansion into highly industrialized market economies like Germany, seeking access to markets and technology and Chinese companies have been closing a record of 30 M&A transactions in Germany in 2014. Much has been said about China's investments abroad in recent years. Many are threatened by China's expansion. Some have become China followers eying the vast opportunities China's FDI inherits. Others now actively begin observing the phenomenon of China going global. Setting China's internationalization into perspective has not always been the case in past discussions. However, the motivations and trends of Chinese direct investments are predictable by applying FDI theory, by observing China's economic strategy and macroeconomic environment and by being aware of some of China's needs. For those who know how to put China's foreign direct investments into perspective, opportunities are outweighing any threats. THE BEGINNINGS The development of China's OFDI is characterized by a policy imperative of the Chinese central government of 2001, when it announced the "go global" policy for its corporations and enterprises. Before that, China has mostly been a receiver of FDI in order to add capital to its extensive existing resources and to fuel the nation's economic development throughout its implementation of the Reform and Opening Policy initiated in 1978. Now, with the "go global" policy in place, Chinese corporations would seek opportunities abroad.  

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Putting China's FDI in perspective, China has been a more active foreign investor than Germany in recent years and it has been overtaking Germany in regard to FDI flows in 2012 for the first time. China has become a major source of foreign direct investments and has increased its position within East Asia, thereby also surpassing Hong Kong, which in addition serves as a major hub of Chinese direct investments. The stock of China's outward foreign direct investments is increasing constantly and China is keeping up fast.  

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2004!

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2010!

2011!

2012!

2013!

East Asia! Hong Kong, China! China!

China's FDI flows, 1990 - 2013 (in USD billion) compared to Hong Kong and East Asia (incl. China)

Source: UNCTAD WIR 2014; Fig.: Ginkgo Tree Advisors

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1990! 1995! 2000! 2006! 2007! 2008! 2009! 2010! 2011! 2012! 2013!

United States! Germany! China!

China's FDI stocks, 1990 - 2013 (USD billion) compared to Germany and USA

Source: UNCTAD WIR 2014; Fig.: Ginkgo Tree Advisors

CHINA A MORE ACTIVE INVESTOR THAN GERMANY

China's OFDI 2013: In 2013, China invested 101 billion USD abroad compared to 58 billion USD of Germany and 338 billion USD of US FDI flows, according to data from UNCTAD. Together with Hong Kong, it is now the largest source of outward foreign direct investments in East Asia. China's FDI sock is steadily increasing. Compared to the USA and Germany however, China's FDI stock is still low.  

-! 50,0!

100,0! 150,0! 200,0! 250,0! 300,0! 350,0! 400,0! 450,0!

1990! 1995! 2000! 2007! 2008! 2009! 2010! 2011! 2012! 2013!

Germany! China! United States!

China's FDI flows, 1990 - 2013 (USD billion) compared to Germany and USA

Source: UNCTAD WIR 2014; Fig.: Ginkgo Tree Advisors

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STRENGTHENING ITS POSITION IN THE WORLD

0%!1%!2%!3%!4%!5%!6%!7%!8%!

China! Germany!

0%!1%!2%!3%!4%!5%!6%!7%!8%!

China! Germany!

China increased its FDI position in the world with rapid speed. Between the years 2000 and 2013, China's FDI flows increased from almost zero to a 7% share of total global FDI. China is here to stay. FDI stocks have increased by about 2% in the same period. Comparing the development of the China's and Germany's percentage share of global FDI flows and stocks between 2000 and 2013, the rapid increase of China's foreign direct investments become obvious once more. In 2000, China's share of total global FDI flows was almost zero. In 2013, it has not only increased to an astonishing 7% of total global FDI streams, but China has also surpassed Germany, which share of total global FDI flows decreased in the same period by 1%, to 4% altogether. And China is here to stay. Germany has invested in the world for many decades. This is reflected in a 6% share of total global FDI stock. However, that share is slighty decreasing compared to Germany's FDI stock in 2000. China on the other hand, a bit more than one decade after commencing the "go global" policy has increased its percentage of global FDI stock by 2%, arriving at 2.2% of global FDI stock in 2013.

FDI stock in % of total global FDI stock, 2000 and 2013 China and Germany.

Source: UNCTAD WIR 2014; Fig.: Ginkgo Tree Advisors

FDI flows in % of total global FDI flows, 2000 and 2013 China and Germany.

Source: UNCTAD WIR 2014; Fig.: Ginkgo Tree Advisors

§ China's outward foreign direct investments have increased rapidly since the formulation of the "go global" policy in 2001.

§ In 2013, China's foreign direct investments surpassed the 100 billion USD mark.

§ China has become a more active foreign direct investor than Germany and has repeatedly

surpassed Germany since 2012 in terms of FDI flows.

§ China will continue to strengthen its position in the world and it is here to stay.

§ China's global FDI stock amounts to 2,2% of the world's total FDI stock.

§ The rapid development is impressive, but in perspective, the current share of China's FDI stock does not reflect the actual position of China in today's global ecomomy and China's FDI is continue to increase further.

2000 2013 2000 2013

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WHY DOES CHINA INVEST? MOTIVATIONS.

In economic theory, there exist several explanations and motivations for conducting FDI. A country like China is also able to inspire economists to develop of new theories. The United Nations Conference on Trade and Development, short UNCTAD, defines foreign direct investments as "an investment involving a long-term relationship and reflecting a lasting interest and control by a firm in an entreprise resident in a foreign country." FDI further comprises of three components. Those are equity capital, (a company purchases shares of a foreign entreprise), reinvested earnings, e.g. no dividends are paid to the parent company and intra-company loans or debt transactions, borrowing or lending going on between a parent and its entreprise abroad. There are different ways how FDI is recorded, depending on each country's specific statistical system.  

Economic theory knows several FDI models that can help explain China's foreign direct investments. The general thoery of FDI is based on transactional economics and tells us that firms tend to internalize missing or imperfect external markets until the cost of further internationalisation is larger than its benefits. Firms choose locations for their constituent activities that minimize the overall costs of operations. Multinational companies prefer to substitute external contacts by direct ownership and internalize hierachies. Another explanation is that the outward and inward FDI position of a country is systematically related to its economic development, relative to the rest of the world, according to the investment development path. The Eclectic Paradigm of Ownership, Location and Internationalisation Advantages (OLI) states that FDI from developing countries are realized by combining particular advantages available to developing countries' multinationals. Labor-intensive technology, cultural similarity, economic geography and asset-seeking FDI are other regular motives.

The location aspect of the general FDI theory and the eclectic paradigm suggests three primary motivations:

§ Foreign-market seeking FDI

§ Efficiency-(cost-reducing)-seeking FDI

§ Resource-seeking FDI (incl. strategic-asset seeking FDI)

Since technology is one of the most important strategic assets, we can add

§ Technology-seeking FDI as a fourth major motivation for Chinese foreign direct investments.

§ China is building long-term economic relationships with the world

§ China is seeking markets, strategic assets (technology) and efficiency

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WHERE DOES CHINA INVEST AND HOW?

Germany has been one of the top destinations for Chinese companies in 2013. Germany is among the top 3 investment destinations in the EU, just behind the UK and Luxembourg. Germany is also among the top 10 destinations for China's investors worldwide. Germany was once again a top location for Chinese investors in 2013, according to data of MOFCOM, the Chinese ministry of commerce. Within the European Union, only the UK and Luxembourg attracted more Chinese direct investments. Foreign direct investments in those two jurisdictions are characterized by a high degree of investments in the financial and real estate sector. Germany in comparison attracts more investments into businesses from "Mittelstand", German small and mid-sized companies. Therefore, one can assume that Germany's economy might profit proportionally more from Chinese investments, since those investments are directed into the economic base of the country. Chinese direct investments in Germany are likely to be more sustainable, providing opportunities for German businesses to grow with the support of a Chinese partner or investor.

From a global perspective, China's top destinations 2013 were Hong Kong and the Cayman Islands. Those destinations typically are not the final destinations of FDI, but serve as major hubs for Chinese companies to invest further. Excluding Hong Kong and the tax havens leaves us with a better idea of where China invested on a global scale in 2013.

Greenfield FDI vs. M&A transactions The value of China's foreign direct investments in the form of greenfield investments has remained stable in 2012 and 2013. Chinese companies have conducted less greenfield FDI projects, however. Between 2012 and 2013, the number of Chinese greenfield foreign direct investments has decreased from a total of 352 projects to a total of 314 projects in 2013. In comparison, Germany has conducted 1.255 projects in 2013. The value of total Chinese greenfield FDI projects has remained stable and amounted to 19.3 billion USD in 2013. (2012: 19,2 billion USD) The value of total cross-border M&A transactions with China as the country of origin has seen an increase from 38 billion USD in 2012 to 50.1 billion USD in 2013. The change between 2012 and 2013 has been extraordinarily high. This confirms the trend of how China's companies and investors are conducting foreign direct investments. The significance of greenfield FDI decreases compared to a higher value and number in direct investments via M&A transactions.

Source: UNCTAD WIR 2014

0! 1! 2! 3! 4!

Germany!

Canada!

Russia!

Luxembourg!

United Kingdom!

Indonesia!

Singapore!

Australia!

USA!

Top Destinations of China's FDI flows in 2013 (in USD billion)

Source: MOFCOM, Statistical Bulletin of China's OFDI

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0! 100! 200! 300! 400! 500! 600! 700! 800!

Niedersachsen!

NRW!

Hamburg!

Bayern!

Hessen!

AND THE REGIONAL WINNER IS...

0! 50! 100! 150! 200! 250!NRW!

Hessen!Bayern!

Baden-Würtemberg!Hamburg!

Berlin!Niedersachsen!

Rheinland-Pfalz!Schleswig-Holstein!

Mecklenburg-Vorpommern!Sachsen!Bremen!

Sachsen-Anhalt!Brandenburg!

Thüringen!Saarland!

North-Rhine Westphalia (NRW) has developed into a major China hub over the last decade and is now home to over 800 Chinese corporations. NRW continues to attract Chinese direct investments in the form of greenfield and M&A projects. Other German federal states are also constantly strong in terms of attracting Chinese direct investments. According to Bundesbank data, Hesse, Bavaria, Hamburg, North-Rhine Westphalia and Lower Saxony were the top destinations of Chinese FDI in 2012 (published March 2014). Compared to data from a few years back, those federal states have transformed into the favored regional destinations for Chinese FDI and show up regularly at top ranks in FDI statistics. What about other federal states? Either there is no data published for some federal states by Deutsche Bundesbank due to confidentiality measures or the foreign direct investments of Chinese companies investing in those regions are marginal. Looking at total FDI distributions, 793 billion EUR have been invested in Germany in 2012, according to Bundesbank. Of those 793 billion EUR, 218 billion EUR have been invested in North-Rhine Westphalia, which made the state the top FDI receiver in Germany. Hesse ranked second and received 137 billion EUR of foreign direct investments. If we now consider FDI flows from China for North-Rhine Westphalia and Hesse, we see that Chinese FDI flows are still marginal compared to total FDI inflows. Accordiing to Bundesbank, total Chinese foreign direct investments in Germany amounted to 1,56 billion EUR in 2012. What does that mean for attracting Chinese investors? An interesting mix of sectors, among others, has supported the development of North-Rhine Westphalia into a major China hub. Putting the existing sectoral structure to work, actively matching it to investors and looking ahead is key for a successful attraction of Chinese foreign direct investments. Strategy clearly wins. From an economic development perspective, work starts at the city level in cooperation and guidance with state institutions. Investments by Chinese companies will continue to increase over the next years and current regional rankings leave potentials for other regions in Germany to actively promote investments by Chinese companies and create a favorable environment.

Total FDI flows to German federal states in 2012 (in EUR billion)

Source: Deutsche Bundesbank, 2014; Fig.: Ginkgo Tree Advisors

Chinese FDI flows to German federal states in 2012 (in EUR millions)

Source: Deutsche Bundesbank, 2014; Fig.: Ginkgo Tree Advisors

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Germany has seen another record year in M&A transactions by Chinese companies and institutional investors. In 2014, 30 transactions have been closed by Chinese investors, acquiring stakes or majorities in companies such as Tom Tailor, SCHUMAG AG, S.A.G. Solarstrom AG and BHF Bank. Strategic and financial investors from China have closed 30 transactions involving German targets in 2014. This sets a new record high in terms of Chinese M&A activity in Germany. For those transactions, a total transaction value of over 1.7 billion EUR was reported. Since not every transaction price or invested capital is reported, the actual transaction volume might be significantly higher. This publication compiled the reported M&A transactions conducted by Chinese companies and investors in Germany in 2014.

Sectoral Focus of Chinese M&A Transaction in Germany 2014 Top 5 Sectors (representing 24 transactions out of 30 total)

Source: Compilation Ginkgo Tree Advisors, p.12

0! 1! 2! 3! 4! 5! 6! 7! 8! 9! 10!

Banking & Financial Services!

Apparel!

Electronics, Solar & Photovoltaic!

Automotive Products & Accessories!

Industry Equipment & Machinery!

# of Transactions!

CHINESE M&A TRANSACTIONS IN GERMANY 2014

2014 30 DEALS

over EUR 1.7 BILLION INVESTED

The major motivations to invest in German companies in 2014 were once more strategic asset- (technology) and market-seeking foreign direct investments. Of the 30 deals recorded, 16 transactions involved German companies in the industry equipment & machinery sector as well as the automotive sector. Adding the electronics sector and bankrupt solar and photovoltaic manufacturers, this number increases to 24 transactions, alone in the three sectors just mentioned. Fosun International's investment in BHF Bank was one of the first major Chinese investments in Germany's financial sector and strategically a smart move by the Chinese private equity house. It was also Fosun that acquired a stake in Tom Tailor, showing the immense opportunities a well thought-through investment of a Chinese institutional investor can create for German companies. The figure on the right shows the number of transactions by sector of Chinese companies in Germany in 2014.

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CHINESE M&A TRANSACTIONS IN GERMANY 2014

TARGET / ZIEL SECTOR / SEKTOR ANNOUNCE DATE BUYER / KÄUFER PERCENT

ACQUIRED

INVESTED CAPITAL (Mio.EUR)*

Peine GmbH Apparel Jan.. 14 Shandong Ruyi Science & Technology Group Ltd. 51% n/a Penta Hotel Holdings Ltd. Travel & Leisure Jan.. 14 New World China Land Ltd. 100% 13,5 KHD Humboldt Wedag International AG Industry Equipment & Machinery Jan.. 14 Aviation Industry of China (AVIC) International Engineering Holdings 100% 285 Columbus Holding GmbH Toys & Recreational Products Jan.. 14 Goodbaby International Holdings Ltd. Goodbaby Hong Kong Ltd. 100% 78 Solutronic AG Electronics, Solar & Photovoltaic Jan.. 14 Shanghai ChuRui Energy Technology Co. Ltd. 100% n/a Cybex GmbH Retail Jan.. 14 Goodbaby International Holdings Ltd. 100% 82 Wilbert Turmkrane GmbH Industry Equipment & Machinery Feb.. 14 Nanyang Guoyu Seal Development Co. Ltd. 100% n/a Weingut Diehl-Blees Agriculture Mär.. 14 Jiangsu Jinpu Group Co. Ltd. 100% n/a BHF Bank Banking & Financial Services Apr.. 14 Fosun International Ltd. via Billion Infinity Investment Ltd. 19,18% 98,5 Sunways AG / Solar Inverter & BIPV Bus Electronics, Solar & Photovoltaic Apr.. 14 Shunfeng Photovoltaic International Ltd. 100% n/a Kokinetics GmbH Automotive Products & Accessories Juni. 14 AVIC Electromechanical Systems Co. Ltd. 100% n/a SCHUMAG AG Industry Equipment & Machinery Juni. 14 Meikai Group Meibah International GmbH 47,85% 5 KACO GmbH & Co. KG Automotive Products & Accessories Juli. 14 Zhongding Sealing Parts 80,00% 64 IMA Automation Amberg GmbH Industry Equipment & Machinery Juli. 14 Ningbo Joyson Electronics Corp. via Preh GmbH 100% 20 KOKI TECHNIK Transmission Systems GmbH Automotive Products & Accessories Juli. 14 AVIC Electromechanical Systems Co. Ltd. 100% n/a TOM TAILOR Holding AG Apparel Juli. 14 Fosun International Ltd. FCM Beteiligungs GmbH 23,16% 87,5 Deutsche Mechatronics GmbH Industry Equipment & Machinery Aug.. 14 DuTech Holdings Ltd. Tri Star GmbH 54,50% n/a Lübeck Airport Transportation & Infrastructure Aug.. 14 Puren Group 100% n/a Alterprodia GmbH Automotive Products & Accessories Aug.. 14 Ningbo Huaxiang Electronic Co. Ltd. NBHX Automotive System GmbH 75% 1 S.A.G. Solarstrom AG Electronics, Solar & Photovoltaic Aug.. 14 Shunfeng Photovoltaic International Ltd. 100% 153 Künkel-Wagner Prozesstechnologie GmbH Industry Equipment & Machinery Sep.. 14 QME Qingdao Machinery Industry Corp. 100% n/a Zenith GmbH Industry Equipment & Machinery Sep.. 14 Fujian Quangong Machinery Co.Ltd. Q&G Maschinenbau GmbH 100% n/a Avancis GmbH Electronics, Solar & Photovoltaic Sep.. 14 China National Building Materials Group Corp. (CNBM) 100% n/a WACO GmbH Industry Equipment & Machinery Sep.. 14 Jiangsu Hengli Highpressure Oil Cylinder Co., Ltd. 51% 0,24 Boge Elastmetall GmbH Automotive Products & Accessories Okt.. 14 Zhuzhou Times New Material Technology 100% 315 Dürkopp Adler AG Industry Equipment & Machinery Okt.. 14 ShangGong Europe 29% 13,9 Hilite International Automotive Products & Accessories Okt.. 14 AVIC Electromechanical Systems Co. Ltd. 100% 522 Renesas Electronics Europe GmbH (Display BU) Electronics, Solar & Photovoltaic Nov. 14 Tianma Microelectronics Co.Ltd. via Tianma Europe GmbH 100% n/a Heidelberger Druck. AG / Postpress Packaging BU Industry Equipment & Machinery Nov. 14 Masterwork Machinery Co. Ltd. 100% n/a Hanwha Q-Cells GmbH Electronics, Solar & Photovoltaic Dec. 14 Hanwha SolarOne Co. Ltd. 100% n/a Source: Reuters, DB Research, Deloitte, JUVE, Company / Advisor Press Releases, own research

Note: not every transaction is reported, therefore this compilation presents the M&A transactions 2014 acc. to our most diligent research. This compilation claims no completeness

Total Invested 1.739

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SIGNIFICANT TRANSACTION TRENDS IN 2014

Private Equity on the Rise China's institutional investors have become respected members of the international finance community in recent years. Not only China's sovereign investors, like the China Investment Coporation (CIC) and the foreign exchange administrator (SAFE) are active market participants, but also several private investment houses have made a name for themselves lately. Fosun International, Hony Capital and Legend Capital are some of the names of the hour. Fosun has made two respectable investments in German companies in 2014, namely BHF Bank and Tom Tailor. Other investors this year represented a good mix of private Chinese enterprises and state-owned entreprises (SOE). AVIC, one of China's largest SOEs was China's most active investor in Germany in 2014. Established Players Strike Again Another phenomenon is M&A activity by Chinese companies, which already have acquired a German company in the past.They are likely to make a move again, potentially due to familiarity with the German market, management and leadership styles and a successful integration of prior acquisitions into their portfolio. One 2014 example is the acquisition of IMA Automation Amberg GmbH, via Preh GmbH, which was acquired by Ningbo Joyson Electronics Corporation, earlier.

Quality of Transactions Increases Of the 30 deals compiled in this report, 5 deals involved bankrupt German companies. While companies in financial distress remain general targets, Chinese companies do seek suitable acquisition opportunities that are able to add an operational and / or technologic edge to the Chinese buyers' current portfolio, and / or to provide market access or an established brand. Distressed companies only partly satisfy those criteria. Chinese investors have become more selective and are eying healthy companies as their own operations in China have moved higher up the value chain in recent years. A modest current average deal value / invested capital of EUR 60 million in 2014 points in the direction that with an increasing number of transactions and increasing requirements by Chinese companies, transaction values are likely to increase further in the future. Two selected M&A cases are outstanding among 2014's M&A transactions and are presented below. M&A cases:

§ FOSUN

§ AVIC

What other significant trends exist besides access to technology and markets as the main motivations for FDI by Chinese companies in Germany? Sophisticated capital on the rise: Chinese private equity investors are making moves - and they are smart. Market familiarity leads to new deals: Chinese companies already active in the German market make additional acquisitions, partly via their recently acquired German subsidiaries Healthy companies, larger deal size: For the reported transactions in 2014, the average deal size was around 60 million EUR. Chinese companies still grasp distressed opportunities, but are primarily seeking profitable enterprises with higher enterprise value.

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2014 M&A AND INVESTMENT CASES

FOSUN - BHF Bank Fosun acquired a 19.18% stake in BHF Bank via one of its funds in a consortium deal involving RHJ International, AQTON SE (Stefan Quandt) and Timothy C. Collins. The deal is one of the strategically smartest moves a Chinese investor has made in the German financial sector until now. Fosun, which was founded in 1992 is a Chinese conglomerate which places importance on China's growth. Its operating activities include insurance, industrial operations, investment and asset management. In 2007, Fosun International, the parent company of Fosun Group, was listed on the main board of the Hong Kong Stock Exchange. In 2010, Fosun has embarked on a new global strategy, which core is "Enhancing Fosun's global development capabilities based on Fosun's competitive advantage as a China expert", with a view to building a global platform that integrates domestic and overseas resources. Through Fosun's global platform, Fosun's global resources, such as cross-border capital, talent, technology and brand can be realised, thereby enabling the company to create value globally for its investors. In 2014, Fosun has made two investments in German companies, namely Tom Tailor and BHF Bank, the latter undoubtedly one of the most strategically meaningful investments by a Chinese investor in Germany as of today.

The 2014 investment cases of Fosun and AVIC perfectly symbolize the trends and motivations of Chinese foreign direct investment activity in Germany. Chinese private equity funds have become a major investor in European companies in the recent past. They are able to provide growth opportunities through capital, market access and synergies with their respective portfolio companies. In addition to strategic investors like SOEs and private entreprises, they represent a new class of investors from China. The economic base in Germany and here especially the strong, private mid-sized corporations offer an array of opportunities for Chinese strategic investors to upgrade their technology base, access new markets and enhance their value chain. Fosun, as one of China's most sophisticated private investment houses, and AVIC, one of China's large-scale state-owned entreprises, represent the diversity of China's investor base and the braod range of acquisition spectres in outward foreign direct investments in 2014, also in Germany.

The co-investment in BHF Bank by Fosun was conducted in a consortium with RHJ International and through a 19.18% stake in Kleinwort Benson Group Ltd. together with AQTON SE, Stefan Quandt's investment arm and entities of Timothy C. Collins, a private equity veteran. The consortium finally acquired a 100% equity stake in BHF Bank this year after going through negotiation and regulatory proceedings. BHF Bank is a Frankfurt-based financial institution that once was part of Sal. Oppenheim, the private bank which was rescued by Deutsche Bank in 2010. BHF Bank was consequently put up for sale by Deutsche Bank. BHF Bank has a strong client base among German high net-worth individuals, family offices and family enterprises. The Fosun move is smart in a way that it further enhances Fosun's strategic position in Europe's financial centers. In addition, the acquisition of the equity stake in BHF Bank adds to the financial capabilities of Fosun through personalized financial services and products. Having a strong Chinese partner on board allows the company to increase its international standing and most importantly, benefit from access to the Chinese market. In regard to BHF Bank, Fosun is planning to build a platform and network for its investment business in Europe and to also tap into Germany's high net-worth market with private entrepreneurs and their family businesses, hence opening doors for the Chinese market.

...continue on next page

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2014 M&A AND INVESTMENT CASES

The Fosun - BHF deal combines classic strategic-asset and market-seeking motives and stands for the immense potential enhancing a strategic partnership between German and Chinese companies through the involvement of Chinese private equity firms. The figure below shows the consortium structure with Fosun International for acquiring 100% of BHF Bank in March 2014. Deutsche Bank received a cash payment from Kleinwort Benson in the amount of 91% of BHF's equity, 9% was paid with equity of RHJ International.

AVIC - Hilite International The Aviation Industry Corporation of China (AVIC) Electromechanical Systems Co.Ltd., a subsidiary of the Aviation Industry Corporation of China (AVIC), a Chinese state-owned enterprise and a global Fortune 500 company, acquired Hilite International from private equity house 3i in 2014. This recent transaction represents a remarkable ownership change from an international financial investor to a Chinese strategic buyer. The acquisition of Hilite International by the Chinese state-owned entreprise is valued at between 473 and 522 million Euro and thus one of the largest transactions of a Chinese company in Germany to date. Hilite International is an automotive supplier to companies like BMW, Daimler and Volkswagen. It engineers and manufactures systems and components to improve fuel consumption and reduce emmission. Hilite International employs around 1.400 employees and it's 2013 revenue was 391 million EUR. With AVIC as the new owner, Hilite is being integrated in a global industrial conglomerate. China's strategic buyer is gaining technology, market share and is able to gain efficiency throughout AVIC's value chain.

On the other hand, Hilite achieves new synergies and an even deeper access to the Chinese automotive market, where it has long established production facilities. This acquisition might be able to proof that Chinese investors are adding value to operations and are able to successfully create synergies and benefits for German target companies. Post-merger integration or a well-managed stand-alone solution with a strategic vision are key to lift all synergies. China very well got what it takes.

BHF Bank

Billion Infinity Investment Ltd.

FOSUN International

Kleinwort Benson Group

Ltd.

RHJ International

AQTON SE

Timothy C. Collins

provided EUR 98,5 for 19,18%

12,40%

19,18%

100%

65,78%

2,65%

FOSUN-BHF Bank Investment Consortium Structure Source: DB, BHF, FOSUN press releases

Fig.: Ginkgo Tree Advisors

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§ China's outward foreign direct investments (FDI) in Germany will continue to increase § More M&A-driven investments, along with larger deal sizes

§ The role of Chinese private equity will gain further importance

§ China's real estate investors will significantly increase their engagement in Germany § Potential for German regions to attract further investments and creating a favorable environment for Chinese investors is still to be lifted

 

OUTLOOK 2015

GINKGO TREE ADVISORS FOCUS

COMPANY PROFILE

GINKGO TREE ADVISORS Ginkgo Tree Advisors is a Munich-based boutique advisory firm with international mandates and shareholdings in China, Germany and the US. Our unique advisory focus is on China's internationalization and going global. Ginkgo Tree Advisors provides strategic advisory services to corporations & entrepreneurs, institutional investors & high net-worth individuals and public sector & government, supporting clients with their strategic challenges of internationalization and cross-border activity. We possess a deep understanding of the Chinese and European markets, we work solution-driven and implementation-focused and we are able to utilize a global partner network, which makes us a trusted advisor to our clients. This publication was authored by Daniel Koller, Founder and Managing Partner of Ginkgo Tree Advisors. Ginkgo Tree Advisors welcomes any questions, feedback and media inquiries. Please direct your message to info@ginkgotree-advisors.com. © Ginkgo Tree Advisors 2014. All rights reserved. GINKGO TREE ADVISORS UG www.ginkgotree-advisors.com info@ginkgotree-advisors.com

 ABOUT THE AUTHOR Daniel Koller is Founder and Managing Partner at Ginkgo Tree Advisors, a Munich-based boutique advisory firm. He mainly advises strategic and institutional investor mandates from China with their activities in Europe. In China, Mr. Koller is advisor to Chinese private equity funds. Before founding Ginkgo Tree Advisors, Mr. Koller was working in the shareholder controlling department of a German DAX 30 corporation and was responsible for subisidiaries in his role as legal shareholder. Further, he supervised companies in the M&A and carve-out process. Mr. Koller was China Advisor of the State Chancellery of North-Rhine Westphalia and at the China Competence Center of the City of Duesseldorf. He further held working positions at an US investment fund in Hong Kong as well as the Delegation of the European Union to China in Beijing. Mr. Koller has received a diploma degree of the University of Duisburg-Essen and has studied Economics and Chinese at the University of Duisburg-Essen and Tsinghua University. He is fluent in German, English and Chinese.