(Introduction)
· Good morning
· My name is Jesse Bhattal, Chief Executive Officer of Lehman Brothers Asia
· Honored to be speaking before such a distinguished crowd
· [ADDRESS KEY INDIVIDUALS] - IS SHERRY GOING TO BRIEF JESSE ON THIS?
· I have been in this industry for nearly 20 years
· Throughout this time, no topic has stirred more excitement and anticipation than China. The tremendous promise of China's growth is indeed unprecedented, and I am delighted to be a part of this forum as it relates to China's development.
· Of course, an important component of that growth story is how to sustain China's rapid expansion. I will also present to you the increasingly important role of the international capital markets in providing China with much-needed capital, along with our views on the strategies that China's leading corporates could undertake to access this growing capital pool.
(page one)
· China's economic growth and development have been nothing short of a miracle .
· China's success to date can be attributed to many factors, but one important recurring theme has been China's ability at taking advantage of major global economic shifts and creating policies conducive to its own economic priorities including:
- Initiating economic reform program post the Cultural Revolution in the late 1970s and early 1980s
- Devaluing the RMB in the mid 1980s to compete against other Asian and South American countries and attract foreign direct investment
- Initiating SOE reform and privatization
· These achievements are a great testament to the Government's prudent leadership and economic guidance
(page two)
· China's entry into the WTO represents yet another one of these seminal events
· China's development over the past 20 years has adequately prepared itself for this landmark event, in terms of infrastructure, human resources and a more transparent and improved regulatory framework
· We expect to see upon China's entry
- A more competitive industry landscape
- Globalization of Chinese industry and some of its leading companies
(page three)
· To achieve projected growth of about 7% per annum for the next 10 years, China will need massive funding resources, or approximately $6 trillion for fixed asset investment.
· We estimate that capital markets will contribute no less than $500 billion, or 8% of total.
(page four)
· In addition to fixed asset investment, capital raising in China will be pursued to achieve other important objectives.
· SOE restructuring, re-capitalization of the financial services sector, infrastructure development and nurturing private sector growth will be among the government's key economic priorities.
Background Info: The privatizations (equity offerings) in the pipeline in next 4 years are around US$58 billion in China, the banking sector recapitalization is estimated to be between US$ 76bn (RMB630bn) to US$239bn (RMBl,980bn), depending on the true extent of the bad-loan problem.
(page five)
· Of course, this begs the question - where will all this money come from?
· As China's economy and capital markets framework further develop, the role of commercial banks, China's traditional source of capital, will be gradually reduced.
· The capital markets will thus play a significantly more important role
- By 2010, 13% of the total capital to be raised, or $104 bn, $80 bn more than that of 2000.
· The benefit of accessing the capital markets are critical to the ongoing modernization and expansion of China's economy:
- Longer-term financing
- More efficient allocation of capital
- Greater liquidity
(page six)
· Although China's domestic capital market will continue to provide a core source of funding to medium and small sized companies
- international capital markets will continue to grow in importance for large companies pursuing offerings of size
· The international markets, on the other hand, have been characterized by a smaller number of offerings, but a much larger average offer size
- Moreover, much of this international capital raising has been completed in the equity markets
- We believe that the debt markets are still developing in China, and will become an increasingly important source of financing in the longer term
(page seven)
· International offerings provide Chinese corporates additional benefits particularly for offerings of scale, among them
- Broadened and global investor base
- Access to long-term capital
- Increased liquidity
- Global profile
· Moreover, international capital market listings are essential to introducing best class business practices, market discipline, technology and global standards into China's leading enterprises.
· For example, China Mobile since its IPO has become of one of the top five mobile operators by market cap and Sinopec has become one of the top 50 petrochemical companies.
- International listing process has helped these companies to become ranked as world-class operators
(page eight)
· The examples of large companies raising significant amounts of capital through global capital markets have been well documented in other major non-US economies.
· Of the ten largest non-US IPOs since 1992, all have accessed multiple capital markets or had international tranches reaching global investors.
· Listing China's most promising corporates overseas is of strategic importance.
(page nine)
· Already, the process of accessing global capital markets with large size offerings has met with a great deal of success.
· Beginning with China Mobile, the five largest IPOs in China since 1997 have raised a total of $18 bn.
· As I mentioned earlier, aside from the large sums raised, these companies have significantly raised their profile as well as their respective industries to global investors and their industrial counterparts, enhancing the overall industrial might of China.
(page ten)
· Lehman Brothers anticipates that the available pool of investment funds for Chinese equities will continue to grow
- Top global institutions have been increasing their equity investments in China, reflecting positive outlook towards continued growth of China's vast economy
- We expect investments to double in the next 5 years
- Moreover, relatively limited supply has caused significant pent-up demand for China equities
(page eleven)
· Global investors have gone through two phases with respect to investing in Chinese companies
- From 1993-1996, the key theme was China exposure; investments were more opportunistic and focused in manufacturing industries
- Since 1997, and beginning with China Mobile, global investors began to look at China as a longer-term opportunity, which in turn created a more favorable longer-term funding climate for issuers.
- For investors, China Mobile, China Unicorn, Petrochinal. offers the same kind of liquidity and prospects as AT&T and Exxon, but offers potentially higher returns with limited risks given their respective monopolistic market positions in China.
- With China's entry into WTO, additional key industries such as financial services, telecommunications, power will attract global investors
· Another key theme that has enhanced investor interest in China is that it has consistently demonstrated strong growth, even through periods of global economic decline
- Favorable counter-cyclical play
(page twelve)
· Global investors will look at several factors to measure the investment merits of China's enterprises and, ultimately, the success of a potential offering.
- In addition to growth potential and dominant domestic market position, investors will also be attracted to strong management teams, good corporate governance and globalization potential
- Government support will also help reduce market/country risk and speed up a company's development pace
(page thirteen)
· Of course, the expertise of a trusted financial advisor can also greatly facilitate the success of any company's first foray into the capital markets.
· Lehman Brothers is uniquely positioned to assist Chinese companies with respect to their financing needs and objectives
· We were ranked the #1 best performing Investment Bank in the S&P 500 in 2000, as ranked by BusinessWeek magazine, one of the most reputable and authoritative business journals in the world
· Additionally, we are the oldest US investment bank on Wall Street, which gives us a long history of expertise and understanding of the global markets.
(page fourteen)
· In addition to having won numerous awards in Asia, we have had the honor of pioneering some of the earliest international offerings for Chinese companies, including the IPO of Huaneng Power in 1993, then the largest IPO ever to emerge from China.
· Most recently, we successfully completed the second largest IPO of the year for PTT in Thailand, and we are advising China Unicorn and Sinopec Shanghai Petrochemical on several landmark transactions.
(page fifteen)
· In conclusion, let me say that:
· China's growth is truly unprecedented in scale
· To sustain this growth, massive capital will be required
· Accessing global markets will help nurture and develop China's leading enterprises
· Achieving these goals requires adherence to key success factors in accordance with fundamental investment themes
· Lehman Brothers can help China's leading enterprises achieve these goals