Rest Insured

China’s State Counsel is the final decision maker in whether it will approve state banks to get into the insurance business. If the decision goes through, it will mark a significant change in the way individuals residing in China turn for an insurance provider. Small, mom-and-pop insurance corporations will be squeezed out by heavyweight banks that provide everything from health insurance to earthquake insurance. Some feel that keeping insurance firms separate from powerhouse Chinese banks such as HSBC and Bank of China will keep such entities from becoming too powerful. The risk of banks being short of cash while also providing insurance would send a massive shock through any economy, let alone one as vast as China’s.

The decision for this increased bank autonomy rests mainly in the hands of Vice Premier Wang Qishan, the government’s point man on financial issues. His decision is part of a continuing debate – should China encourage its financial sector to consolidate into fewer powerful entities that offer a range of products from checking accounts to insurance to capital management? Citigroup tried to do this when it bought Traveler’s Group in 1998 and since then the merge has been very unattractive to investors. Citi is an immense organization with over 370,000 employees worldwide; they are currently trying to sell some of its business lines as they see how detrimental it is to dabble in many sectors.

Allowing insurance providers to invest in a range of products could also turn out very successful, thus the sector has caught the eye of many investors looking to put capital in the hands of capable firms. Look at the success of Warren Buffett’s Berkshire Hathaway; an insurance company that seizes huge stakes in other companies. Some Chinese insurers are finding loopholes even before the government makes a decision – they buy property which they occupy, using 10% of the building and leasing out the rest. Commercial properties may not be a bad bet for insurance companies because they generate steady streams of revenue that insurers crave. However, letting insurance companies and banks to merge will no doubt be extremely complex. China is still at a disadvantage for a serious integration – much of its financial services are still handled over the counter making it difficult to venture into the business of offering their customers an even further range of tools.

Player of the Month

Lily Jin is the Investment Director for the Growth Capital division of 3i Group, and has been named August’s Player of the Month. 3i is a leader in completing successful private-equity deals; the firm operates out of several offices throughout the globe. Ms. Jin has been a huge asset to 3i, thus much of the corporation’s success in Asia has been attributable to her savvy investing tactics and superb leadership. She has been the primary deal maker behind some of China’s most successful buyouts. On top of being the Investment Director and Chief Representative for 3i’s Beijing office, Ms. Jin is also the Co-head for North Asia; she has extensive experience with private-equity in both China and Europe and is fluent in English as well as written and spoken Mandarin. Needless to say, Ms. Jin brings a thick rolodex to a firm such as 3i who can benefit greatly from her list of contacts and skilled management.

Prior to joining 3i, Ms. Jin spent 10 years with Actis, a UK private equity firm, and returned to China and established Actis’s China operations in 2000. Lily’s investment track record includes: China Mengniu Dairy, the largest dairy brand in China and one of the most successful private equity deals in China; Suntech Power Holdings, now the largest solar cell and solar panel manufacturer in the world; Grentech, China’s leading mobile coverage system manufacturer; and CNOOC, the largest offshore oil exploration and production company in China. Lily sat on the board of China Mengniu Dairy for 3 years and was an observer on the board of Suntech Power Holdings.

Ms. Jin focuses her effort primarily on consumer and energy related sectors at 3i. The most recent completed deal she sourced at 3i was John Hardy, a leading high end designer jewelry brand. She received her MBA degree from Manchester Business School in 1995 and holds a bachelor degree in English Literature.

Ms. Jin was voted “The best Venture Capitalist in China“ by Forbes in two consecutive years of 2006 and 2007.

Fast Train for China

Today marks the 89th anniversary for the death of Andrew Carnegie, the tycoon of steel and the first revolutionary in the railroad business. Now, in the 21st Century, we have commercial airplanes, automobiles of every shape and speed, even Mache-speed jets, yet the popularity of railroad travel remains extremely popular. Look to China if you don’t believe me. The Giant in the East controls 24% of global railroad traffic, yet only has 6% of the world’s track. The sector has been somewhat of a barely-explored venture until a few years ago, as demand for rural Chinese to enter urban areas has surged along with gigantic growth in China’s manufacturing sector.

Nearly half of China’s population still remains spread out on rural farms and small villages, while there is noticeably larger demand for people travelling among the metropolitan cities. The amount of raw materials being shipped from the Western provinces of China to the manufacturing hubs on the Eastern coast have tripled in the last four years, as the preferred shipping method within China remains freight. Meanwhile, China’s railroad service can satisfy only about 35% of demand for manufactured products, and the 2.4 million seats of capacity is far short of the 3.4 million in daily demand for individual travel. China is clearly getting the ball rolling quicker recently, when the government approved 1.25 Trillion Yuan (~ $160b) in order to build railroad infrastructure through 2010. Connecting the vast country will sustain China’s growth pattern for decades, as nearly every part of the railway supply chain will benefit from the sector transformation.

The sector has drawn particular attention from investors, with many overseas locomotive companies looking to grab a piece of China. In 2007, Alstom Transport, one of the largest railroad companies by market share, signed two contracts worth more than $465 million with the Railways Ministry to build electric freight locomotives and high speed lines on the mainland. Or take Daqin Railway, which operates China’s biggest coal hauling line. It raised $2 billion in an IPO, its share price rising over 80% for the year, dominating China’s railroad sector along with only a few other players. All aboard the fast train.

Banks Looking for Cash Turn to Private-Equity

American banks that are strapped for cash are turning to private equity firms in an effort to shore up balance sheets and bring ailing earnings back to life. Massive equity firms with deep pockets aren’t hesitating to make sizeable investments in banks whose balance sheets have suffered billions from the credit crunch, while Wall Street analysts predict write-downs to continue for several quarters. Firms such as Texas Pacific Group are making risky bets such as their $7 Billion capital injection into Washington Mutual, in all taking a 50.2% stake in the bank. Washington Mutual has had their shares destroyed by investors in the last few months, and private equity cash dilutes shares and makes it even tougher for investors to profit.

I have analyzed some of America’s largest banks in order to better understand their capital position – there are twenty one banks with current assets exceeding $80 Billion. Washington Mutual alone has in excess of $317B, making it the sixth largest bank according to asset size. Despite its breadth, the asset size of the firm is irrelevant considering the current condition of the bank. Instead, look at the Return on Equity in order to evaluate the risk attached to TPG’s investment. ROE is annualized net income as a percentage of average equity on an annualized basis. In June, 2007, right before the credit crisis began to unfold; Washington Mutual had Return on Equity (ROE) of 12.89% and a stock price of almost $40, respectably. Investors generally consider ROE over 5% or 6% very healthy for a bank. The ROE is currently -17.02% due to heavy losses, and its stock price has dropped simultaneously, and currently hovers around $5. Their losses alone have eaten up a chunk of their equity base, and if losses continue for an extended period of time, there may be little, if any equity left on the balance sheet. Investors will continue punishing the stock as long as write-downs persist, knowing that WaMu is cutting deep into the little amount of capital they have remaining. TPG may be hesitant to double down for a second time if the bank continues to lose money. A bad investment? Not really. But clearly a risky one, as it may have been too early for TPG to jump in to supply the bank with cash. They could have been patient to see how the next few quarters turned out, with the possibility of buying the company cheaper, and with a lot less risk attached to it.

Get Savvy -- Gamble on Macao

For global investors and entrepreneurs looking for a sure thing, maybe they should look to Macao. In the midst of unprecedented growth, the gambling sector in China is attracting large dollars from casino titans around the world, yet certain individuals seem to be running away with the gold. The gaming hub in China takes place in Macao; the semi-autonomous region of mainland China located about seventy miles from Hong Kong. Las Vegas’ most famous casino tycoons have tried to claim huge stakes here, but none have been as successful as the American-Jewish billionaire Sheldon Adelson, the chairman and largest shareholder of Las Vegas Sands Corporation. For nearly forty years, Macao was ruled by Chinese entrepreneur, Stanley Ho, who enjoyed a government-granted monopoly on all of Macao’s gambling rights. However, the tables are turning in the new millennium; the gates to Macao have opened with a limited number of gaming licenses and Adelson has bolted far ahead of the pack in China’s gambling scene.

Adelson has earned the reputation of a savvy businessman since he began playing the casino business in 1989 when he bought Las Vegas’ old Sand’s Casino and built the largest private convention center in the country. In 1997, he broke ground on the Venetian in Las Vegas to cater to a growing number of businessmen and high-rollers travelling through America’s hottest gambling hub. The venture was so successful that in July 2001 the Vice-Premier of China, Qian Qichen, pushed Adelson to open a Venetian in Macao, as some skeptics thought Adelson was playing a tough hand considering each Chinese national citizen (excluding those in Hong Kong) needs a permit to enter the city in order for the government to control the number of visitors. In May, 2004, the first gamblers entered the Sands Macao. Its construction costs were two hundred and sixty-five million dollars, and Adelson made back his initial investment in a year. In December, 2004, Adelson took Las Vegas Sands public (according to Forbes, he owns sixty-nine per cent of the stock) and became a multibillionaire, overnight. The following year, Macao drew 10.5 million mainland Chinese visitors, a hundred and forty-seven per cent more than three years earlier—reflecting an easing of travel restrictions and an increase in the number of newly wealthy Chinese. By the end of 2006, Macao had become the top gambling center in the world, with gaming revenues exceeding $6.9 billion, a quarter of a billion dollars more than those on the Las Vegas Strip. The ambition and prudence of Adelson came early in his strong relationship with Qian, whose clout among leaders in China gave him the ability to win gaming licenses over Strip rivals such as MGM Mirage, who at the time was a much larger and financially powerful entity. The only other American casino magnate to win a license was Steve Wynn in 2002, but he moved much slower than Adelson and did not complete the Wynn Macao until two years after Sands opened. The success of Las Vegas Sands in China highlights how far the Chinese have come in their movements toward growth and capitalism, not to mention how much room there is to expand. In fact, Adelson plans on creating the “Las Vegas Strip of Asia,” on Cotai, an island linked by adjacent bridges to Macao. Adelson plans to spend roughly ten billion dollars to build a dozen new hotels, twenty thousand rooms, and high-end brands including the Four Seasons; all of the casinos will be owned by Las Vegas Sands. For a guy in the casino business, it doesn’t seem like Adelson is gambling on much – the numbers from China alone speak for themselves.