BY SHAWN MESAROS

IPO Listing Assessment and Privatization in China

Going Public and It’s Benefits

Increased Public AwarenessGain in capitalImproved credit termsVehicle for Compensation

The public company could now offer stock to its employees and management

Provides a public valuation of a business Makes it easier to enter M&A deals

Refer to page 12 for more information

Is Going Public Always The Best Option?

Initiating an IPO could have a plethora of disadvantages: Erroneous and Time Consuming Shareholder Value could be scrutinized against

competitors A company’s stock price will turn out to be the

detrimental element in making decisions The Tyranny of Quarterly Targets

Refer to page 13 for more information

Any Alternatives?

Reverse Mergers The acquisition of a public company by a private

entity Why? Bypass Lengthy process of going public Less interference from investors Mostly occurred in the past

Refer to page 14 for more information

Going Public in China

When is a company considered ‘ready’ to go public?

Clear shareholder structure No major dispute on the title of key assets Profits for the previous three years must not be

less than RMB 30 million No principle change in operations for the

previous three years No indication of any risk towards repayment of

debt

Tax Rules and Regulations

PRC Taxation System Tax on Income Tax on Transactions Tax on Specific Objectives Tax on Resource Tax on Property Tax on Behavior Tax levied by Customs Tax levied by Finance Department

Refer to page 15 for more information

Reasons for Going Public

Creating Liquidity for current insiders

Raising Capital

Refer to page 16 for more information

Privatization

The process of transferring ownership of a business from the public sector to the private sector

There are several forms of privatization: Share Issue Privatization Asset Sale Privatization Voucher Privatization Privatization from Below

Refer to page 17 for more information

Advantages of Being Private

The Government plays no role in the functioning of the firm

Puts a higher emphasis on customer service

Competition in Privatization increases differentiation

• Refer to page 18 for more information

Disadvantages of Being Private

Less transparency to the public

Lack of financing options

• Refer to page 19 for more information

Privatization Case Study: Harbin Electric

Listed in the US in 2005 by a reverse merger with a shell company called Torch

Why did it decide to go private?

Although it reported record revenues in 2010, the chairman of the company felt that Harbin Electric was overvalued and could not meet future expectations

Accused of misrepresenting information on the SEC filings which led the stock price to fall dramatically

Notes on ‘Going Public and it’s Benefits’

• By going public, a company receives much more public attention and even more everyday by being traded on the stock market. IPO’s often generate publicity by making their products known to a new group of potential customers.

• The core financial benefit from going public is that the company is able to raise capital. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt.

• A business that goes public may also find it easier to obtain capital for future needs through new stock offerings or public debt offerings.

• Yet another advantage of going public involves the ability to use stock in creative incentive packages for management and employees. Offering shares of stock and stock options as part of compensation may enable a business to attract better management talent, and to provide them with an incentive to perform well.

Notes on ‘Is Going Public Always The Best Option?’

• The biggest disadvantages involved in going public are the costs and time involved. Experts note that a company's management is likely to be occupied with little else during the entire IPO process, which may last as long as two years. The business owner and other top managers must prepare registration statements for the SEC, consult with investment bankers, attorneys, and accountants, and take part in the personal marketing of the stock. Many people find this to be an exhaustive process and would prefer simply to run their company.

• Another disadvantage is that going public is extremely expensive. In fact, it is not unusual for a business to pay between $50,000 and $250,000 to prepare and publicize an initial public stock offering.

• Whether one likes it or not, analysts expect the company to put out numbers that shows how it will perform in the coming quarters. Whatever numbers a company gives, it must meet them because the market hates surprises.

Notes on ‘Any Alternatives?’

• A reverse takeover or reverse merger is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company.

• In a reverse takeover, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation. Therefore, investors do not usually interfere in the functioning of the firm.

However by 2007, the reverse mergers trend had stopped for several reasons. Some of which include: Company Assets residing in China lead to investors in the United States not being able to understand the

assets.

The investors in the United States rarely speak to the management in China. They only contact the unreliable “IR” representatives and are hence not being able to understand the goals of the firm.

Company majority owners are in China

Notes on ‘Tax Rules and Regulations’

Tax on Income Corporate Income Tax (CIT) Individual Income Tax (IIT)

Tax on Transactions Value Added Tax Consumption Tax

Tax on Specific Objectives Land Appreciation Tax

Tax on Resource Resources Tax

Tax on Property Real Estate Tax

Tax on Behavior Vehicle and Vessel Tax

Tax Levied by the Customs Custom Duties

Tax Levied by Finance Department

Deed Tax

Notes on ‘Reasons for Going Public’

• By going public, a company can create a market for its stock. In general, stock in a public company is much more liquid than stock in a private enterprise. Liquidity is created for the investors, institutions, founders, owners and venture capital professionals. Investors of the company may be able to buy or sell the stock more readily upon completion of the public offering. This liquidity can elevate the value of the corporation.

• By offering stock for sale to the public, a company can access a substantial source of corporate funding. If a company needs to raise capital, it can sell stock (equity) or it can it issue bonds(debt securities). An initial equity offering can bring immediate proceeds to a company. These funds may be used for a variety of purposes including; growth and expansion, retiring existing debt, corporate marketing and development, acquisition capital and corporate diversity.

Notes on ‘Privatization’

• Privatization is the incidence or process of transferring ownership of a business, enterprise, agency, public service or property from the public sector (the state or government) to the private sector (businesses that operate for a private profit) or to private non-profit organizations.

• Share Issue Privatization – The selling of shares on the stock market• Asset Sale Privatization – Selling of an entire organization to a strategic investor, usually by

auction.• Voucher Privatization – Distributing shares of ownership to all citizens at an extremely low price.• Privatization from Below – Start – up of new private businesses in formerly socialist countries.

Notes on ‘ Advantages of Going Private’

• Lack of Government Intervention: It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state owned enterprises often employ too many workers increasing inefficiency.

• Increased Differentiation: Often privatization of state owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency.

Notes on ‘Disadvantages of Being Private’

• Less Transparency: When private companies agree to contracts from the government, especially long-term ones, the companies can begin to cut corners to increase profits. Unless the contracts include specific reporting criteria, these businesses' modes of operation may prove difficult to monitor.

• Lack of Financing Options: The greater number of financing options available to public companies are listed below:

• The issuance of additional stock in a secondary offering• An exercise of warrants, where stockholders have the right to purchase additional shares in a

company at predetermined prices. When many shareholders with warrants exercise their option to purchase additional shares, the company receives an infusion of capital.

• Other investors are more likely to invest in a company via a private offering of stock when a mechanism to sell their stock is in place should the company be successful.