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Behind the Scene: A Closer Look at President Xi’s Visit to Kazakhstan and the Capital Name Change of Astana

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Behind the Scene: A Closer Look at President Xi’s Visit to Kazakhstan and the Capital Name Change of Astana

                                                                                                            September 26, 2022

On September 14, Chinese President Xi Jinping arrived in Nur-Sultan, his first overseas trip since the outbreak of COVID-19 in January 2020. “Bound together by mountains and rivers and common interests, China and Kazakhstan are good neighbors, good friends, and good partners,” said President Xi in a signed article before his state visit to Kazakhstan. A few days later, Kazakh President Kassym-Jomart Tokayev signed a law limiting presidential terms and reverting to the old name of the Central Asian country’s capital, Astana.

As the ninth-largest country in the world in terms of territory and the second-largest republic in the former Soviet Union, Kazakhstan was endowed with over 72 different natural resources, including oil, gas, gold, coal, iron, uranium, manganese, bauxite, and chromite. Of these, oil and gas comprise 97% of all natural resource state revenues because the country has the 12th largest proven oil reserves and 14th largest natural gas reserves worldwide.[1] It is the world’s largest producer of uranium as well. Furthermore, considering its geographic location, Kazakhstan offers access across Eurasia to the Caspian nations and onto Europe via Russia and Turkey, minimizing national border controls and maximizing rail connectivity, and providing oil and gas pipelines that channel its energy resources directly to Europe and China. Nevertheless, although rich natural reserves have helped Kazakhstan cultivate a prosperous economy and a solid middle class, similar to other former Soviet Union states, Kazakhstan encouraged the rise of a small group of wealthy oligarchs and thus deteriorated inequalities.

The widespread dissatisfaction with inequality and corruption precipitated the bloody riots this January, which grew out of peaceful protests over a spike in car fuel prices. The incident left over 230 people dead, mostly civilians, and drew the president’s attention to launch a wide-ranging set of reforms as he called for “completely new standards for a political system with fair and open rules of the game.” Kazakhstan’s recent move to revert to the former name of the capital and limit presidential mandates to a single seven-year term, together with its economic reform approaches such as reducing the government’s involvement in the market and oligarchs’ influence on business, transforming the Samruk-Kazyna sovereign wealth fund as a supplement to private investors, and ensuring fair competition, a better investment climate, and the integrity of private properties, has again demonstrated its determination not only to eliminate triggers for further turmoil but also to restore its growth engines, especially beyond primary commodities trade and the inflow of foreign direct investment. 

If we break down the contributions to the GDP by sectors, Kazakhstan has a services-tilted economy. Though Kazakhstan has a relative comparative advantage in agriculture, the country remains a net food importer. That is because, despite the fact that Kazakhstan is endowed with the world’s fifth largest agricultural land, sufficient water resources, a clean natural production base, and proximity to large markets, according to the World Bank Group, only 30% of the land has been used.[2] Agriculture only makes a small contribution (an average of 5% in the past decade) to GDP. The government is planning to stimulate agricultural growth (including livestock) to upgrade its value chain, boost exports, and create more jobs, in which process a number of critical investments and transformations are required in both the public and private sectors.

The manufacturing and industrial production sector concentrate on mineral fuels, crude petroleum, liquefied petroleum gas, and coal. Though there have been increased exports of chemicals and manufactured goods such as copper, ferroalloys, and silver, soaring logistic costs and the consequent high final export price is hampering Kazakhstan’s competitiveness in the global market, as well as inhibiting the expansion of investment in non-primary sectors.[3] As a result, industrial product diversification and market sophistication have worsened in the past few years (representing 33% of GDP on average). The government aims to address this issue by constructing a more modernized transport infrastructure and achieve the country’s 2050 Strategy through greater openness and the decentralization of power.[4] The president proposed slicing the strategic goal into specific tasks, including accelerating production and expanding the range of processed goods, advancing industrial capacities, and expediting technological development and digitalization of manufacturing industries.[5]

 

The services sector is not only the main driver of the economy (averaging 55% in the past decade) but also the largest employer (64% of the total workforce in 2019).[6] The main services subsectors are wholesale, retail trade, transport, financial services, education, healthcare, and real estate. Trade plays an essential role in Kazakhstan’s development. It offers opportunities for the country to diversify its economy away from oil and hedge the risk of external commodity price volatility. But to benefit from these opportunities and be on the way toward economic diversification, Kazakhstan may need further structural reforms to address gaps in transportation and logistics, remove infrastructure bottlenecks, divert “high-potential” sectors towards global value chains, facilitate the functioning of factor markets (finance, land, and labor), and stimulate the development of small and medium businesses.

(Data Source: World Bank National Accounts)

Consequently, Kazakhstan has decided to bet on trade innovation and the inflow of foreign investment to transform into a more diversified economy. International trade has long been playing a vital role in Kazakhstan’s economy, with a slightly above world average trade-to-GDP ratio. On the one hand, Kazakhstan is a founding member of the Eurasian Economic Union (EAEU) and has become a member of the WTO since November 2015, with 3,512 tariff rates lowered gradually to an average of 6.1% in 2020.[7] Major imports include electronics, machinery, mechanical appliances, mineral products, transport equipment, base metals, chemicals, and food and beverages, while the top import partners are Russia, China, South Korea, and Germany.[8] The country currently has 29 free trade agreements, mainly through EAEU; yet nontariff barriers are still high, such as the long waiting to clear exports and imports, as well as the recent move towards import substitution to protect a few local industries, given the current geopolitical situation.[9]

On the other hand, while the bulk of exports still comes from oil, Kazakhstan has been trying to diversify its exports with the goal to increase its non-commodity exports to $41 billion by 2025. In 2020, Kazakhstan’s exports in services only accounted for 10.8% of exports in commodities (USD$5bn vs. USD$46.4bn), with the majority exporting to China, Italy, Russia, and the Netherlands. The Kazakh Ministry of Trade and Integration has launched a couple of policy instruments to boost trade relations between Kazakh enterprises and potential importers, traders, and distributors; for instance, the export accelerator program directed 35 Kazakh companies to the market of China via B2B meetings in 2020.[10] Nonetheless, the supply chain disruption in the past two years due to the Covid-19 pandemic has presented tough challenges in logistics. Hence the formation of convenient logistics routes might bring positive spillovers to exports, particularly along the Belt-and-Road (BRI). It is estimated that a reduction in shipment time is usually critical to the energy sector but can benefit non-oil exports even more, precisely those time-sensitive inputs.[11] Besides, aligning exports with this trend depends on the government’s effectiveness in implementing complementary reforms that encourage supply, as well as on the number of adequate foreign investors with the requisite technology to produce competitively.

(Data Source: International Monetary Fund,
World Bank, and OECD GDP Estimates)

So far, Kazakhstan has established 13 special economic zones and 23 industrial zones with the necessary infrastructure, legal framework, and special benefits and tax incentives to attract investors. It was ranked 25th
in the Ease of Doing Business among 190 countries in 2019, ahead of big
economies like China and Japan and most European and ASEAN countries.[12] FDI, or foreign direct investment, though not a direct component of GDP, is one of the most significant sources of capital inflows, an integral part of an open and effective international economic system, and a major catalyst to development, especially for developing countries and emerging market economies. The Kazakh government recently approved a new investment policy concept in June 2022, aiming to bring the level of investment in fixed assets to 25.1% of GDP and increase the inflow of foreign direct investment to $25.5 billion as early as 2026. “It is necessary to expand the sources of financing of investment projects in non-resource sectors of the economy,” said Alikhan Smailov, the Prime Minister. The long-term plan is to reap the benefits of FDI, such as improving labor productivity, increasing the volume and complexity of exports, developing new production facilities for higher value-added products, and gradually localizing production.[13] Last year, Kazakhstan’s FDI volume doubled, with capital coming primarily from the Netherlands, the US, Switzerland, and
China.[14]

After all, under the global shadow of low economic growth, unyielding inflation, and interest rate hikes, compounded by the Russia-Ukraine geopolitical crisis and the aftershocks of the pandemic, it is not likely the case – at least in the coming years – that Kazakhstan will easily accomplish its 2050 Strategy and squeeze into the top 30 global economies. Yet one thing is for sure; the country has never been more open than it is today. 

[1]  Natural Resource-related County Analysis Kazakhstan, February 2019

[2] https://www.worldbank.org/en/country/kazakhstan/brief/gw-livestock-development-program-for-results

[5] https://primeminister.kz/en/news/reviews/technological-upgrade-investment-inflow-innovation-boom-or-how-kazakhstan-made-an-industrial-breakthrough

[6] https://data.worldbank.org/indicator/SL.SRV.EMPL.ZS?locations=KZ

Will Kazakhstan Revitalize the Bottlenecked Asia-Europe Trade Route Through the Middle Corridor?

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Will Kazakhstan Revitalize the Bottlenecked Asia-Europe Trade Route Through the Middle Corridor?

                                                                                                            August 19, 2022

Kazakhstan, the strategic linchpin country in Central Asia, recently accentuated its plan to make the Trans-Caspian route a priority for the country’s oil exports. Located in a region rich in natural resources and crucial for trade and commerce between Europe and Asia, Kazakhstan has drawn the roadmap to build and safeguard uninterrupted international transit traffic. “The Trans-Caspian route meets the security requirements for the supplies and the demand for transcontinental cargo delivery,” said Kazakh Prime Minister Alikhan Smailov at Boao Forum for Asia 2022.  

The Trans-Caspian International Transport Route, widely called the “Middle Corridor”, is a multilateral institutional development linking China’s rail freight transport networks and the EU through Central Asia, the Caucasus, Turkey, and Eastern Europe. Since the war in Ukraine commenced this spring, which retarded trade going through the “Northern Corridor” (China, Kazakhstan, Russia, Belarus, Poland, Germany), investing in the “Middle Corridor” has become more relevant and appealing. “Following the results of five months this year, the volume of transportation of Kazakhstan’s cargoes along the route increased 2.5 times, and the total cargo turnover with the Caspian countries increased by more than nine percent,” highlighted Kazakh President Kassym-Jomart Tokayev at Sixth Caspian Sea Summit in June 2022.

With a population of over 19 million, Kazakhstan is the largest and wealthiest country in Central Asia. It is one of the most influential states along the Caspian Sea, which has a significant strategic value because of its geopolitical location, rich natural resources, and transit potential. Bordered by Russia, China, Turkmenistan, Uzbekistan, and Kyrgyzstan, Kazakhstan thus plays a vital role in the Belt and Road Initiative since the country can offer access across Eurasia to Europe via rail connectivity from both the Northern (Russia) and Middle (Turkey) Corridor, minimizing the risk and cost of border controls. Nevertheless, this year, international sanctions against Russia have affected its neighbours, who traditionally regard Russia as the Asia-Europe trade and transport window, to look for alternatives. As a result, both Kazakhstan and other Caucasus nations have turned to the Trans-Caspian route as the solution, which has not yet reached its full potential as the route has only accounted for 5% of the northern route’s capacity so far. 

To realize the Middle Corridor’s full potential and facilitate its use as the main transport route, central Asian countries have been investing billions of dollars in infrastructure. For instance, Kazakhstan has spent around USD$35bn over the last 15 years on developing its infrastructure, resulting in more than 2,000 kilometres of railways, 19,500 kilometres of roads, 15 airports, and new port capacities along the Caspian Sea. Nur-Sultan, the capital of Kazakhstan and previously known as Astana, is now striving to solidify partnerships and intensify diplomatic talks to make full use of the Trans-Caspian route. The government is also launching a series of political reforms and anti-crisis measures to create a beneficial environment for foreign investment and sustainable development. As stated in 2019, Kazakhstan is fulfilling its ambition on both strategic and tactical dimensions to join the world’s top 30 economies by 2050. 

Nur-Sultan is one of Armor Capital’s regional offices. The region contains a vast storehouse of oil and natural gas, which Europe urgently needs to lessen its reliance on Russian and Middle Eastern energy supplies. Besides, as a former Soviet Union state and a stop along the ancient Silk Road, what geopolitical stance will Kazahstan take between the power play? Any other endeavours Kazahstan makes for economic and trade facilitation, such as free trade agreements? Please follow Armor Capital’s Investment Watch series for the next story of Kazakhstan’s natural and geopolitical endowments. 

About Armor Capital

Armor Capital has supported business owners in capital financing, M&A advisory, and valuation since 2009. We are served by a core team of experienced professionals and a global network of expert sources. Our partners, Guillaume Caillet, Jean Giorgis, and Fabrice Govin, combine 60 years of experience in the US, Europe, and Asia-Pacific, and lead a team of over ten M&A professionals based in Paris, Hong Kong, and mainland China. Enhanced by practical knowledge and motivated by the success of our clients, our team has a commitment to ethics, integrity, and performance. We boast expertise in corporate finance, private equity, cross-border business development, and entrepreneurship.

Directors’ Duties in a “Desperate” IPO Market

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Directors’ Duties in a “Desperate” IPO Market

By Frederick Chann
July 25, 2022
After a very quiet Q4 2021 and Q1 2022, and in spite of a continually weak and volatile market, 21 IPOs were launched in Q2 2022.  All but five were announced in the last 10 days of the quarter, just before the requirement for the inclusion of H1 2022 financial data kicked in. 

In this article, we look at the anatomy and consequences of a “desperate” IPO market.  We also review directors’ duties to shareholders and investors.  Those are the same in any market environment, but take on much greater significance in challenging times, especially for independent non-executive directors (“INEDs”).  
Anatomy of a “Desperate” IPO Market

Broad Market Weakened Significantly – Fast!

  • The Hang Seng Index (“HSI”) declined close to 30% since June 30, 2021.

Underwriting Revenues Dried Up

  • IPO funds raised dropped in Q1 2022 by two-thirds from Q4 2021 and close to 90% from the year prior (source: HKEx).
  • Underwriters needed to close deals to bring in much needed revenue …. and keep their jobs!

Significant Backlog Built Up

  • By the end of Q1 2022, there were over 150 active IPO applicants (source: HKEx).
  • These companies needed capital to fund their growth and / or extend their cash runways (i.e. survival).
  • If they waited till after June 30, they would have had to refresh their financials which would take 6-8 weeks.
What Transpired?  Disasters!

   During Q2 2022, 21 IPOs were launched.

  • All but two were announced during or after the second week of June. Traffic jam!
  • 16 provided a pricing range – three quarters of those were eventually priced at or very near to the bottom.
  • In spite of that, only 5 (i.e. less than a quarter) are trading above issue (see Appendix).
  • Only 8 (i.e. just 38%) are outperforming the benchmark HSI.
  • GOGOX, which launched its IPO relatively early, saw its share price dive 22% on the first day and 42% by the end of the first week!
  • That first trade took place on June 24 – 5 days before the next deal was priced. Way to set the tone for the 17 that followed!
  • In merely weeks, three companies lost 26% (Yoho 2347.HK), 45% (Lushang Life Science 2376.HK) and 64% (GOGOX 2246.HK) of their respective market values!
Directors' Duties

 

   Should directors of these companies have anticipated this?

  • Absolutely! 
  • Perhaps not the exact magnitude, but they certainly should have had a good sense of the overall market and importantly, what the reasonable ranges of valuation would have been for their respective companies.
  • Besides having conducted their own due diligence, they should (and would) have consulted with the lead underwriters.

   What are directors’ duties to existing shareholders and prospective investors?

 

  • Directors – executive, non-executive and INEDs – all have fiduciary responsibilities to all shareholders.  It is a balancing act!
  • Fiduciary” has both a legal and ethical element. “Trust” and “prudence” are often included in its definition.
  • In the cases cited above, it is hard to argue that their directors had fulfilled their fiduciary duties.

   Why is the role of INEDs unique and so critical in a “desperate” market environment?

  •         As discussed earlier, in such instances, companies are racing against the clock, desperate to raise funds.  Underwriters are desperate to close deals and bring in much needed revenue.
  •      So who are there to act for and protect the minority shareholders, including new investors? INEDs!

   What should INEDs be doing?

  1. Do your own due diligence.
  2. Seek and document professional advice.
  3. Apply independent judgement.
  4. Speak up at board meetings.
  5. Last resort – resign! 

Final Thoughts

 

   ·       If this had taken place in a more litigious market like the US,

o   class action lawsuits would have been filed left, right and centre, against not just the companies, but individual board directors and underwriters as well!

o   the Securities & Exchange Commission would be breathing down their necks. 

   ·    I would be most disappointed if the Securities & Futures Commission does not at least launch preliminary investigations into the more notable disasters.  It does not bode well for the Hong Kong market.

   ·       Individual investors who should often wonder if they will be represented well,

o   do your own homework – read the prospectus, starting with the “Risk Factors” section

o   due diligence the directors, especially the INEDs

   ·       Board directors of IPO companies which have seen quick and significant de-valuations,

o   going forward, how much higher will the premiums for your companies’ directors’ and officers’ liability insurance be?

o   how long will it take before your companies can return to the market and raise capital? 

o  how long will it take for you to recover your personal reputation?

Fred is a Director & Senior Advisor at Armor Capital. He advises C-suite executives and boards of directors on strategy development and planning, corporate governance, equity & debt financings, IPO preparation and M&A due diligence. In his consultancy practice, he draws upon two decades of experience in investment banking, fund management and entrepreneurship. Fred has also served on the boards of listed and private companies as well as NGOs, in capacities including Chair, Governance Committee & CFO. For 10 years, he was a Fellow of the Hong Kong Institute of Directors. He received both his BA (Hons.) & MBA (Dean’s Honour List) from the Ivey Business School (Canada).

fred@armor-capital.com / +852 9686 5928
Appendix

 

Disclaimer:

No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of Armor Capital. These materials are provided by Armor Capital for informational purposes only, without representation or warranty of any kind, and Armor Capital shall not be liable for errors or omissions with respect to the materials.  Armor Capital declines any liability in relation to this information, nor shall it be liable for any decisions taken based on the information contained on this publication.

Tracking the Progress of Artificial Reefs’ Construction in Brittany, Northwest France

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Tracking the Progress of Artificial Reefs’ Construction in Brittany, Northwest France

Récifs Goëlo, a non-profit environmental association based in Côtes-d’Armor, one of Brittany’s coastal cities, has been dedicated to protecting the maritime ecosystem via artificial reefs in the northwest coast area of France since its establishment in 2016. Like French Mediterranean coast cities, Côtes-d’Armor chose to develop artificial reefs with the long-term objective of increasing biological production in impoverished marine areas and promoting the recovery of the natural environment degraded by human activities. “We had to be tenacious, but we are happy to reach the finish line,” said Michel Rickauer and Michel Brulard, respectively, President and Secretary of Récifs Goëlo.

The artificial reefs, which have been placed on three different sites on the coast of Bilfot, Côtes-d’Armor, are the concretization of several years of discussion and reflection. The idea behind this project was triggered by a group of local sailors who were preoccupied with the deteriorating state of maritime biodiversity in Côtes-d’Armor.

An artificial reef is a human-made and biomimetic submerged structure deliberately placed on the seabed to mimic some functions of a natural reef, such as protecting, regenerating, and concentrating populations of living marine resources. It provides shelter for various species; for instance, it serves as a crucial spawning and foraging habitat for many commercially and recreationally fish species. Furthermore, due to the threat of climate change, both global warming and ocean acidification are affecting marine life, leading to natural coral reefs being bleached and algae being expelled. To avoid the degradation of these marine ecosystems and at the same time encourage their reconstruction, initiatives related to the creation of artificial reefs have emerged globally. Nevertheless, a close and timely monitoring and evaluation of the ecological impacts of artificial reefs are essential to avoid any misplacement or becoming the habitat for invasive species such as the orange-cup coral. 

The roadmap of artificial reefs was initially sketched by Récifs Goëlo to enhance the biodiversity in Bilfot by concentrating as many species as possible around the specifically produced concrete blocks and to see the evolution of the ecosystem and the impact on the surrounding areas. The move caught the attention of the National Museum of Natural History of Dinard (MNHN), which was working on a similar study. The museum then decided to join the environmental protection forces in order to gain more public attention and momentum.

This allowed Récifs Goëlo to raise 100,000 euros in financing to support the project. The Sea and Coastline Commission, which oversees the regional subsidies and the European fund for Maritime and Fishing Affairs (FEAMP), ruled a favorable verdict in May 2021. Three years after application, Récifs Goëlo received a subvention of 80% of the total amount (40% from the region and 40% from FEAMP), while the rest was provided by individual donators and companies that support the movement.

The artificial reefs are locally made and assembled in Caen, a commune in north-western France, by a French engineering college called Ecole Supérieure d’ingénieurs des Travaux de la Construction (ESITC), according to one of MNHN’s scientists. With a diameter of 1.6 meters and height of 1.30m, each artificial reef weighs 3.3 tonnes and has three circular parts, among which two contain shell waste. The artificial habitat will facilitate the proliferation and development of algae, which are key species for the area.

In the meantime, the museum and Récifs Goëlo would cooperate in training twenty divers: ten from Paimpol diving club (ASSSUB) and ten from Saint-quay-Portrieux (Narco Club), with a scientific approach to enable them with the capabilities to monitor the site for the following two years. MNHN is responsible for data collection and analysis as well as study reports. In return, they send their findings to Récifs Goëlo, which will publish the data to the public and media. Récifs Goëlo plans to involve the public with the reef experimentation for more awareness of maritime challenges. “The first thing is to learn about local biodiversity, and then we shall be able to see the evolution across time,” said Michel Rickauer.

However, time and patience are needed to observe concrete achievements. “In our region, for reefs like this to reach an equilibrium state, they will need five to seven years before we can see actual changes. That is why we spent one year for scientific monitoring before, which set the core and basis of the program. Later, the diving club will check the evolution and colonization of the reefs over time,” added Michel Rickauer. “We often say that reefs are the witnesses of climate change, and Récifs Goëlo will be able to certify that. We should also keep in mind that people tend to care more about environmental issues in places they know than big discussions at the global level.”

Armor Capital is proud to be a sponsor of Récifs Goëlo since its founding and is delighted to see the progress and achievement made so far. Armor Capital wishes Récifs Goëlo the best for the future.

About Armor Capital

Armor Capital has supported business owners in capital financing, M&A advisory, and valuation since 2009. We are served by a core team of experienced professionals and a global network of expert sources. Our partners, Guillaume Caillet, Jean Giorgis, and Fabrice Govin, combine 60 years of experience in the US, Europe, and Asia-Pacific, and lead a team of over ten M&A professionals based in Paris, Hong Kong, and mainland China. Enhanced by practical knowledge and motivated by the success of our clients, our team has a commitment to ethics, integrity, and performance. We boast expertise in corporate finance, private equity, cross-border business development, and entrepreneurship.

FERRETTI S.p.A. – Sailing Through Rough IPO Seas

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Ferretti yachts

FERRETTI

S.p.A. - Sailing Through Rough IPO Seas

Published on 13 May 2022
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By Frederick Chann

Ferretti (9638.HK) is a designer and manufacturer of luxury composite yachts, made-to-measure yachts and superyachts under brand names such as Riva, Wally, Ferretti Yachts, Pershing, Itama, CRN and Custom Line. The company operates six shipyards in Italy and sells to customers in more than 70 countries.
Ferretti completed its IPO on March 31, 2022.  Not only was it accomplished in what could only have been characterized as an extremely challenging market, its share price has significantly outperformed the Hang Seng Index (“HSI”).  This case study presents what likely deliberations took place at various stages in Ferretti’s boardroom and the many factors that collectively made its IPO possible. 
Storm Brewing (Q1 – Q2 2021)
·  On February 18, 2021, the Hang Seng Index (“HSI”) reached an intra-day high of 31,183, the highest level since June 2018.
·  Over the next 4½ months, HSI fell by 7-10% and hovered around 28,000 – 29,000.
·   During this period, Ferretti’s board would have had to approve ramping up IPO preparations. It should have been an easy “Go”.
Skies Darkening (Q3 – Q4 2021)
·   When the company would have been close to filing its listing application at the end of Q3, HSI had steadily declined to around 24,000 (i.e. by a further 14-17%).
·    The IPO market was still robust enough with HK$75 bill. raised in each of Q2 and Q3 (source: HKEx).
·    Plenty of time and tens of millions in professional fees had already been sunk.
·    Ferretti’s board now had a tougher, though still rather straight-forward, decision to make.
 ·    Proceed with the listing application, ready the IPO for the spring and hope for a market upturn.
 ·    Meanwhile, IPO funds raised dropped in Q4 by almost 40% (source: HKEx). And the worst had yet to come!
Storms Hit (Q1 2022)
  • January proved to be the (brief) calm before the storms – not one, not two, but three!
    • The resilient US market (S&P 500) started to fall from its all-time high of 4,818.
    • After 2 years of being the poster child of COVID-19 control, Hong Kong experienced a sharp 3-week spike starting in mid-February. Case numbers stayed elevated for another 2 weeks.
    • Meanwhile, Russia invaded Ukraine on February 24, 2022. Oligarchs and their superyachts suddenly became a focus under sanctions by the US, EU, UK, etc. 
    • Even though Ferretti did not have any pending orders from Russian oligarchs and would cease to enter into any sales contracts with Russian and Ukrainian purchasers, it was an untimely distraction – i.e. one extra potential investor concern to have had to address.
  • This would have been around the time when Ferretti’s auditors finished their year-end audit.
  • The prospectus would have been updated and the IPO ready to be launched …. save for one critical factor – the market!
  • HSI fell to as low as 18,235 (intra-day on March 15, 2022, another 20%+ drop since September).
  • No doubt the board had had numerous fist-wringing moments during this time:
    • We had already pulled from one IPO attempt (back in 2019 because of unsatisfactory valuation). We are now in an even tougher market.  Do we hold off?
    • If we do, what is the likelihood of market conditions improving meaningfully in the near term?
    • How long can we hold off for? By June 30, we will have to update our financials.  Given geopolitical and global economic developments, what will our H1 2022 numbers look like?
    • Months of preparation and tens of millions of professional fees had already been sunk. We need the IPO to finance our business plans.  Should we take a shot?
    • If we do and fail, what are the implications?
Wind in Ferretti’s Sails
  • In the end, the board decided to proceed, no doubt with the considered advice of nervous underwriters.
  • The IPO, at an offer price between HK$21.82 and HK$28.24 per share, was announced on March 22, 2022.
  • This decision took guts. Had it not been for the many “ticks” that had been checked off, I very much doubt that the directors would have voted for a go-ahead:
  1. Market to itself – there was no other major IPO being marketed so Ferretti had maximum investor attention;
  2. Scarcity value – there are few listed comparables (notably Sanlorenzo (SL.MI)) and none on SEHK;
  3. Strong majority shareholder with substantial resources (Weichai);
  4. Cornerstone investors – five committing a total of US$130 mill. regardless of share price (as long as it was within the offer range);
  5. Net revenue growth – 47% YoY;
  6. Profitability growth – YoY EBITDA and profit for the year growth of 80% and 70% respectively;
                 7. Dividend paying – Ferretti will be paying out not less than 30% of profits (after deduction of 5% mandatory legal reserves) to                        shareholders; based on 2021 profits of euro 4 mill. and IPO valuation (@$22.88 / share) of HK$5.74 bill. (approximately                                700 mill. euro) (pre-money), a dividend yield in the 1.5% range could be expected … not high, but should have helped; and 
                8. “Over-sized” over-allotment option (or “greenshoe”) – with half of the IPO already spoken for by the cornerstone investors and                      subject to lock-ups, there was plenty of “ammunition” for market stabilization to reduce the risk of sharp declines in the first 30                      days post-pricing.  
Seal the Deal
  • Nevertheless, the IPO was still priced towards the low end of the offer range at HK$22.88 per share.
  • Valuation might not have been ideal, but still a respectable 18.7x TTM P/E (pre-money) – especially considering how rough the market had been, and strong revenue and profitability growth had been only a single year occurrence thus far.
  • By this time, the board’s decision should have been straightforward – get the deal done!
Post-Mortem
  • Share price stayed stable thanks to the “over-sized” greenshoe, which was partially exercised on April 24.
  • It rose to as high as $75 and closed at $22.80 on May 12, 2022 – slightly below the IPO price but still outperformed HSI by 12%.
  • Overall, BRAVO!

Fred is a Director & Senior Advisor at Armor Capital. He advises C-suite executives and boards of directors on strategy development and planning, corporate governance, equity & debt financings, IPO preparation and M&A due diligence. In his consultancy practice, he draws upon two decades of experience in investment banking, fund management and entrepreneurship. Fred has also served on the boards of listed and private companies as well as NGOs, in capacities including Chair, Governance Committee & CFO. For 10 years, he was a Fellow of the Hong Kong Institute of Directors. He received both his BA (Hons.) & MBA (Dean’s Honour List) from the Ivey Business School (Canada). fred@armor-capital.com / +852 9686 5928

Disclaimer:

No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of Armor Capital. These materials are provided by Armor Capital for informational purposes only, without representation or warranty of any kind, and Armor Capital shall not be liable for errors or omissions with respect to the materials.  Armor Capital declines any liability in relation to this information, nor shall it be liable for any decisions taken based on the information contained in this publication.

APAC Logistics Industry Report H1 2020

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APAC Logistics Industry Report H1 2020

Published on 29 October 2020
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Introduction

We are pleased to share with you a summary update of market valuations and activities in the Asia Pacific logistics industry for the first half of 2020.

Logistics is one of the key sectors which Armor specializes in and closely follows market trends. Please contact us for further discussions.

Valuations of Asia Pacific’s public companies were lower over the last two quarters ending June 2020. EBITDA multiples were over 17.7% lower by the end of Q2-2020 (10.7x in Q2-2020 vs 13.0x in Q2-2019).

Based on 90-100 selected companies, the table above illustrates that industry returns are on a downturn, while companies’ margins have been stable over the past five years. Leverage ratios indicate improved financial positions over the past few years.

While H2-2019 were characterized by smaller sized transactions, H1-2020 saw significantly sized deals, pushing up the total transaction volume. Although we observed a smaller M&A deal count in H1-2020, the total transaction value is higher in H1-2020 vs H1-2019.

Armor selected the largest M&A transactions across the region in H1-2020 for which information on implied enterprise value (EV) was available. The median EV/revenue multiple that investors paid was 1.5x.

Source: S&P Capital IQ, Armor Capital Analysis

Logistics is one of the key sectors in which Armor specializes and closely follows market trends.

Please contact us for an in-depth discussion via enquiry@armor-capital.com

APAC Paper Packaging Industry Report H1 2020

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APAC Paper Packaging Industry Report H1 2020

Published on 29 October 2020
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Introduction

We are pleased to share with you a summary update of market valuations and activities in the Asia Pacific paper packaging industry for the first half of 2020.

Paper packaging is one of the key sectors which Armor specializes in and closely follows market trends. Please contact us for further discussions.

Valuations of Asia Pacific’s public companies have lowered slightly in the first quarter of 2020 compared to the same period in 2019, but bounced back in the second quarter.

Based on 200-300 constituent companies, the table above reflects that industry margins have been on a downtrend from its peak in 2018 (latest net income margin is 1.9% vs 3.5% in 2018). Over the same period, leverage of the industry constituents has increased and profitability has decreased.

Most of the paper packaging industry deals in the reported period were in the lower mid market segment (except Q2-2020 and Q1-2019 in which data were unavailable). The transaction values in Q4-2019 and Q2-2019. were pushed upwards by one large deal in each respective quarter. Overall, deal activity was down in the first half of 2020.

Armor selected the largest M&A transactions across the region in H1-2020 for which information on implied enterprise value was available. The largest transaction in the period was the acquisition of Tailim Packaging – a South Korean company which manufactures corrugated boxes – in which the total transaction value was USD 347m.

Source: S&P Capital IQ, Armor Capital Analysis

Paper packaging is one the key sectors in which Armor specializes and closely follows market trends.

Please contact us for an in-depth discussion via enquiry@armor-capital.com

APAC Software Industry Report H1 2020

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APAC Software Industry Report H1 2020

Published on 29 September 2020
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Introduction

We are pleased to share with you a summary update of market valuations and activities in the Asia Pacific Software industry for the first half of 2020.


Software is one of the key sectors in which Armor specializes in and closely follows market trends. Please contact us for a further discussion.

Valuations of Asia Pacific’s public companies have increased every quarter since Q2-2019. Median EBITDA was 44.4x by the end of Q2-2020 vs. 27.4x in Q2-2019 – an increase of 62% year-on-year.

Based on 400-500 selected companies, the table above illustrates that the industry returns have declined over the past few years. Meanwhile, although there is remarkable difference in industry margins between 2017 and 2018, it has remained relatively stable for the past 3 years.

M&A activity (majority stake only) by volume has maintained at 121 in H1-2020, an increase of 14% compared to the same period last year (there were 106 deals in H1-2019). Most of the deals were in the lower to mid-market segment, while 1 transaction drove most of the total transaction value in Q1-2020 (acquisition of Plaid Inc. by Visa Inc. at USD 4,900m).

Armor selected the largest M&A transactions across the region in H1-2020 for which information on Implied Enterprise Value were available. The most remarkable transaction was the acquisition of Creative Knowledge, a Singapore-based company which develops digital education products and solutions. (While the largest transaction was Visa Inc.’s acquisition of Plaid Inc., the relevant multiples of the transaction were private.)

Source: S&P Capital IQ, Armor Capital Analysis

Software is one the key sectors in which Armor specializes and closely follows market trends.

Please contact us for an in-depth discussion via enquiry@armor-capital.com

APAC Education Industry Report H1 2020

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APAC Education Industry Report H1 2020

Published on 18 September 2020
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Introduction

We are pleased to share with you a summary update of market valuations and activities in the Asia Pacific education services industry for the first half of 2020.

Education is one of the key sectors in which Armor specializes in and closely follows market trends. Please contact us for further discussion.

Valuations of Asia Pacific’s public companies fluctuated over last 6 quarters ending June 2020. H1-2020 was characterized by lower multiples, EBITDA multiples were almost 33% lower by the end of Q1-2020 (10.8x in Q1-2020 vs 16.1x in Q1-2019) and almost 21% by end of Q2-2020 (12.5x in Q2-2020 vs 15.8x in Q2-2019).

Based on around 130 selected companies, the table above illustrates that industry returns and margins have been decreasing over the last eight months (latest values) in comparison with 2019.

Overall, first half of 2020 was characterised by lower M&A deal count, while total transaction value continue to show large fluctuations and is pushed up by a few large deals (e.g. China Distance Education – EV USD 284.3m).

Armor selected the largest M&A transactions across the region in 2020 H1 for which information on Implied Enterprise Value (EV) was available. Two transactions stand out, the acquisition of China Distance Education and the acquisition of Harbin Institute of Petroleum.

Source: S&P Capital IQ, Armor Capital Analysis

Education is one the key sectors in which Armor specializes and closely follows market trends.

Please contact us for an in-depth discussion via enquiry@armor-capital.com

APAC Healthcare Industry Report H1 2020

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APAC Healthcare Industry Report H1 2020

Published on 9 September 2020
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Introduction

We are pleased to share with you a summary update of market valuations and activities in the Asia Pacific healthcare industry (equipment and services) for the first half of 2020.

Healthcare is one the key sectors in which Armor specializes in and closely follows market trends. Please contact us for further discussions.

Valuations of Asia Pacific’s public companies have increased significantly over H1-2020 compared to the same period in 2019. Median EBITDA was 35.4x by the end of Q2-2020 vs. 18.7x in Q2-2019 – an increase of nearly 39% year-on-year. In addition, there has been changes in the top 50 constituents, reflecting movement in the competitive environment of the industry.

Based on 400-500 selected companies, the table above illustrates that industry returns and have been stable for the past 4 years, with a slight dip in the latest statistics. Similarly, industry margins have been lower in the latest statistics in comparison to the past 2 years.

M&A activity by volume has been lower over the past 2 quarters with 55-59 transactions (majority stake only) per quarter. The first half of 2020 had fewer mega deals compared to the second half of 2019, lowering the total transaction value for these 2 quarters.

Armor selected the largest M&A transactions across the region in H1-2020 for which information on Implied Enterprise Value and selected multiples were available. The data shows a wide range of multiples for acquisitions.

Source: S&P Capital IQ, Armor Capital Analysis

Healthcare is one the key sectors in which Armor specializes and closely follows market trends.

Please contact us for an in-depth discussion via enquiry@armor-capital.com