22 Jun 2012 13:11
22 June 2012
China Private Equity Investment Holdings Limited (AIM: CPEH)
("CPE" or the "Company" or "Group")
The Company's principal activity is to invest in growth companies operating in Greater China.
Final Results for the year ended 31 December 2011
Highlights
·; Consolidated net asset value rises to US$33.4 million (2010: US$29.3 million)
·; Consolidated net asset value per share of US$0.44 (2010: US$0.46)
·; Year of steady progress for the Company characterised primarily by a significant focus from the management team on assisting investee companies with their development strategies and plans for growth
·; Significant new investment made during the year in Enfinium International Holdings Ltd, a Hong Kong registered company with a global online trading platform enabling clients to trade in stocks, foreign exchange transactions and futures on worldwide exchanges
·; The Board expects Fortel to submit its listing application to the Hong Kong Stock Exchange later this year. The exact timing for submission and for the subsequent IPO will depend on the duration of the vetting process of the regulators and, of course, on market conditions at the time in China and Hong Kong.
John Croft, CPE's CEO commented: "We believe the Group's high quality investment portfolio should generate good returns for our shareholders as we execute our realisation strategies. In addition, opportunities in China for new investments in our areas of focus are reducing in price but increasing in availability. We would like to take advantage of these trends to increase our scale and presence.
"China remains one of the most attractive investment markets in the world and our focus on fast growing sectors within it should prove rewarding."
For further information, please visit www.cpe-invest.comor contact:
Maria Leung, China Private Equity Investment Holdings Ltd:
Azhic Basirov / Siobhan Sergeant, Smith & Williamson Corporate Finance Ltd:
Allan Piper, First City Public Relations (Hong Kong):
Simon Hudson, Tavistock Communications (London):
www.cpe-invest.com
| +852 2801 6770
+44 (0) 20 7131 4000
+852 2854 2666
+44 (0) 20 7920 3170
Ticker symbol: CPEH |
Chairman's Statement
I am pleased to present my statement to you in respect of the year ended 31 December 2011.
The Company's consolidated net assets at 31 December 2011 increased to US$33.4 million (2010: US$29.3 million), with consolidated net assets per share at that date of US$0.44 (2010: US$0.46).
The consolidated loss for the year at US$2.89 million (2010: US$1.89 million profit) resulted primarily from what we believe will prove to be a short term decrease in fair value of our stake in Enfinium Holdings of US$1.7 million, discussed in detail below, along with the operating expenses incurred during the year.
In line with last year, I have asked one of our Directors, Hanson Cheah, an experienced private equity investor in China, to provide an overview of recent trends and activities in the private equity and venture capital market in China. His report is summarised in the section below that follows my statement and confirms that growth prospects particularly in the internet sector remain very exciting and that with major venture capital firms active with ever increasing deal sizes, opportunities at the smaller end of the market where CPEH is focused remain highly attractive.
2011 was a year of steady progress for the Company characterised primarily by a significant focus from the management team on assisting our investee companies with their development strategies and plans for growth. This has in some cases involved restructuring their operations to optimise potential returns, but in general has meant that the management team has had to concentrate its efforts more on the existing portfolio than on sourcing new investment opportunities.
During the year we did make one significant new investment in Enfinium International Holdings Ltd. a Hong Kong registered company with a global online trading platform enabling clients to trade in stocks, foreign exchange transactions and futures on worldwide exchanges. Enfinium's business has been growing rapidly over the past year, resulting in its need to raise working capital to sustain its rate of growth. The timing of Enfinium's cash raise, at a small discount to our entry price due to current market conditions, precluded us from taking part as we were not comfortable with raising money to invest at the current CPEH share price. This decision resulted in the dilution of CPEH's holding in the company from 30% to 24% during the year. We are currently in discussion with Enfinium's holding company owners to broaden the scope of our investment to include their operations in additional geographies. We remain optimistic that this investment, and any subsequent investments, will prove to be attractive for CPEH shareholders.
Another of our cornerstone investments, China iEducation made good progress during the year moving its business from its database sale and licensing model to one based on online services where customers pay an annual fee. The company recently announced that it had signed a key strategic co-operation agreement with the State-run Hunan Centre of Educational Technology in China's Hunan Province, demonstrating a significant early success for its evolving strategy. The prospects for the company remain very promising and we anticipate that it will be ready for a listing on the Hong Kong Stock Exchange in 2014/15.
Fortel also made good progress during the year, through the gradual migration of its business profile from software sales to an increasing focus on a service based model and has achieved steady revenue growth in the last few years. The preparation and plans for Fortel's IPO on the Hong Kong Stock Exchange remain on track, but the ever increasing demands of the regulators with reference to accounting and audit processes on world markets generally and in Hong Kong in particular have necessitated that we commit greater resources to completing the work required to achieve Fortel's listing. In this regard and as previously announced in January, Duncan Chui has stepped down from the Board in order to devote more time to spearheading this important project.
It is expected that Fortel will submit its application for a listing on the Hong Kong Stock Exchange later this year. The exact timing for submission and for the subsequent IPO will depend on the duration of the vetting process of the regulators and, of course, on market conditions at the time in China and Hong Kong. The Board remains convinced that the successful listing of Fortel will represent a major milestone for your company.
Whilst the past year has been a difficult one for investment markets globally, I am pleased to be able to report that our NAV and share price have been in general relatively stable. With limited resources, we have remained very selective about making new investments, but through our work with our existing investee companies as well as via the extensive network of contacts in the private equity community in the region, we have now built up an exciting pipeline of new investments which present attractive potential returns. In order to be able to move forward and take advantage of these, we plan to raise additional capital in the near future and to develop co-investment partnerships with other prominent investors in the region, with further details of this being announced in due course. Assuming we are successful with our proposals to raise additional capital, we will be announcing a number of new investments in the near future.
Patrick Macdougall
Chairman
22 June 2012
An Overview of the Private Equity Market in China
CPE focuses on investments in the technology and financial services sectors predominantly in China and also in the wider Asia Pacific region. In the past year the most attractive sectors in China remain in select areas of Internet and Media as well as in Cleantech.
China is now the world's largest Internet market by every available measure. It is also no coincidence that China has set new highs every year on funds invested by venture capital firms. The Chinese market now has the largest number of users for Internet, mobile, e-commerce and other categories. It has nearly half a billion users and has given birth to some of the world's most vibrant Internet firms, such as Baidu Inc and Tencent Holdings. Venture capitalists have funded these companies and made substantial returns in recent years. However in 2010-2011 a slew of accounting scandals and fears that the corporate structures used by China's Internet firms could face greater scrutiny from Chinese authorities have spooked U.S. investors, dulling their appetite for initial public offerings. Despite having the local ChiNext stock market that was launched in 2009, Chinese Internet firms had always favored the U.S. markets for an exit due to the lack of a profit requirement to list and the high valuations they can command. But from mid-2011, a series of accounting scandals hit Chinese firms listed in North America, leading to trading halts, delistings, lawsuits and regulatory probes in both the United States and Canada. The scandals dampened sentiment for Chinese listed stocks among U.S. investors, and new entrants to the market face skeptical investors and tougher Securities and Exchange Commission rules. Listing documents now also contain more visible disclosures about the structures these companies use, the so-called VIE or variable interest entity, which allows Chinese companies to get around certain rules forbidding foreign investment in sensitive sectors, like the Internet. As a result, there were just six exits through U.S. IPOs in 2011. Venture capital firms now experience delays for their portfolio companies in this market.
Meanwhile venture capital firms are raising larger and larger funds largely on the promise of China. For example, GSR Ventures which was founded with help from Mayfield has gone from an initial fund of US$250 million to managing US$1 billion in less than eight years. The larger fund sizes and the various IPO delays have resulted in funds for early-stage companies drying up. Venture capital firms are now focused on deploying larger amounts of capital and largely ignoring early-stage companies. As the IPO market becomes uncertain for Internet companies, venture capital funds have turned to funding more mature companies or at least companies that are cashflow positive.
Examples of recent transactions are great illustrations of the market today. Lashou.com, China's answer to Groupon and founded in March 2010, had raised US$166 million in venture capital by April 2011, and was then valued at US$1.1 billion. Around the same time the most famous VC firm Kleiner Perkins invested US$20 million into Xiu.com, an e-commerce firm selling high end luxury goods. Recent public listings though have failed to dazzle. In March, online retailer Vipshop became the first China tech stock to list since August, but its shares fell as much as 12 percent on its New York debut. Even a sharp cut in the offer price failed to overcome concerns about mounting losses and its complicated corporate structure. With their capital trapped in companies like Lashou and 360buy, venture capitalists have naturally turned cautious. Venture capitalists have not turned away entirely from China Internet firms, but they are far more selective about where they will invest. E-commerce firms that sell everything one can imagine online took the lion's share of 2011 VC money, but that will not be the case any longer.
Thomson Reuters data shows that venture capitalists poured US$3.6 billion dollars into China's Internet sector in 2011, more than double the figure of US$1.7 billion in 2010. However in the first quarter of 2012, venture capital firms invested just US$138.5 million into China's Internet sector, an 84 percent fall from the US$866.5 million invested in the same period in 2011. This presents an opportunity for CPE as the funds for investment in early-stage companies dry up and more and more venture capital firms turn to larger deals.
The first area of interest for CPE would be the Internet companies that take advantage of the growth of the world's largest Internet market. The growth of users in 3G and 4G mobile networks is the main driver. In the past three years, mobile data transfer in Internet traffic has grown from 1-2% to almost 10% of total traffic. The ubiquity of mobile devices is also driving the switch from e-commerce to mobile commerce. The one difference for mobile internet is that ARPU (Average Revenue per User) is at least 20-30% lower than for regular Internet. This is driven by the smaller purchase amount per user in mobile commerce but also because mobile internet commands less cost per click for advertising platforms.
The reduced cost per click in turn is a result of the advertisers who are demanding better and measurable results for their marketing budget. Advertising to users is no longer as simple as displaying ads on screen when users browse for information. Simultaneously print media advertising is also in sharp decline. Advertisers worldwide are turning to social media networks to get the word out and drive user participation. This is even more evident in China where blogging and social media is the only method for expression in a tightly restrictive country. Social media networks open up a new horizon for targeted advertising, both direct and subliminal. We are investigating companies that have different technology and methods to achieve results. These companies provide customer relationship management tools and dashboard for consumer companies to manage their social media presence.
The social media networks have also created a group of thought-leaders which are followed by large fan bases who value their opinion and recommendations. New technology has emerged to mine such user aggregated content and also drive public opinion for the benefit of advertisers. CPE will continue its focus in these areas of large growth.
The second trend is in Internet infrastructure. This area encompasses all aspects of data transmission and storage for the benefit of users that no longer have to lug around storage devices. The area of cloud computing has driven new installation of servers and corresponding technology to support this area. CPE's anchor investment in Fortel will be spearheading efforts in this industry.
The third industry of focus is in Cleantech. The Chinese Government in the current 12th 5-year plan is holding local governments accountable for the first time for green targets and is investigating the introduction of a carbon tax. On top of this the central government has also pledged to increase the percentage of non-fossil fuel used in energy generation to 20% by the year 2020. These factors are growth catalysts for all aspects of cleantech industries from waste management to new energy saving materials.
According to Lux Research last year over 40% of the venture capital dollars went to industries termed as emerging technology. However on closer examination those industries could also be renamed cleantech because the companies are all developing products in saving energy. These products include advanced materials for better insulation, energy storage devices, LED systems that save power.
One other industry of interest is IT's participation in the growth of the cleantech industry. There is a proliferation of products and devices that not only helps to measure and control energy usage but also collects data and provides analytical tools for users to improve. The data collection and presentation process is now paramount for corporations in the modern era to show that they are socially conscious enterprises intent on projecting an image of caring for the earth and the environment. We believe that CPE has the resources to take advantage of growth in the area of IT data and control for the cleantech industry.
Hanson Cheah
Non-Executive Director
22 June 2012
Extract from the Directors' Report
The board ("the Board") of directors ("the Directors") is pleased to present its report on the affairs of the Company and its subsidiaries (collectively referred to as "the Group"), together with the audited financial statements for the year ended 31 December 2011.
Principal Activities
The Company was incorporated with limited liability under the laws of the British Virgin Islands ("BVI"). The Company's shares were admitted to the AIM Market ("AIM") of the London Stock Exchange on 19 October 2009.
The principal activity of the Company is investment holding. The Group is principally engaged in investing primarily in unlisted assets in the areas of telecommunications, media and technology ("TMT") as well as financial services or listed assets driven by corporate events such as mergers and acquisitions, pre-IPO, or re-structuring of state owned assets.
Results and Dividends
The loss on ordinary activities of the Group for the year ended 31 December 2011 after taxation was US$2.89 million (2010: profit US$1.89 million).
The Directors are not recommending the payment of a dividend for the year.
Review of the Business
The Group's audited consolidated loss for the year ended 31 December 2011 amounted to US$2.89 million (2010: profit: US$1.89 million). The Group's audited net asset value as at 31 December 2011 stood at US$33.42 million (2010: US$29.31 million).
In April 2011, the Company entered into an agreement to acquire a 30% interest in Enfinium for an initial consideration of US$6 million. The consideration was settled by way of issuing 10 million new ordinary shares of no par value of the Company at a price of US$0.60 per share. In November 2011, Enfinium allotted further shares to third parties at a lower price. The Company's interest in Enfinium was thus diluted from 30% to 24%, and based on the lower allotment price, a decrease in fair value of US$1.67 million was recognised during the year ended 31 December 2011.
Fortel Technology Holdings Limited ("Fortel"), a digital media and technology services company operating primarily in China, remained the main component of the Group's net asset value during the year. The Company's equity interests in Fortel were reduced from 37.1% to 33.6%, following a share buyback by Fortel in April 2011. The buyback raised US$3.8 million for the Company.
In view of the promising prospects for the Beijing based China iEducation Holdings Limited ("iEducation"), the Company converted the convertible note issued by iEducation into its ordinary shares, representing a 40% interest in iEducation in December 2011.
In December 2011, the Company entered into a subscription agreement with Max Era Properties Limited relating to the issue of 2,500,000 new ordinary shares in the Company at a subscription price of US$0.40 per share, raising in aggregate approximately US$1 million of new funds for the Company's future investment opportunities and to meet working capital requirements.
John Croft
Executive Director and Chief Executive Officer
22 June 2012
Consolidated Statement of Comprehensive Income for the year ended 31 December 2011
2011 | 2010 | ||
US$'000 | US$'000 | ||
Fair value changes on financial assets at fair value through profit or loss | (1,730) | 2,869 | |
Administrative expenses | (1,426) | (1,056) | |
Operating (loss)/profit | (3,156) | 1,813 | |
Finance income | 274 | 140 | |
(Loss)/profit before taxation | (2,882) | 1,953 | |
Taxation | - | - | |
(Loss)/profit for the year | (2,882) | 1,953 | |
Other comprehensive expense | |||
Currency translation differences | (3) | (68) | |
Total comprehensive (loss)/income for the year | (2,885) | 1,885 | |
(Loss)/earnings per share | |||
Basic | (4.11 cents) | 3.06 cents | |
Diluted | (4.11 cents) | 2.98 cents | |
Consolidated Statement of Changes in Equity for the year ended 31 December 2011
Share capital | Share based payment reserve | Foreign translation reserve | Retained earnings | Total | |
US$'000 | US$'000 | US$'000 | US$'000 | US$'000 | |
Group balance at 1 January 2010 | 24,572 | 799 | - | 2,052 | 27,423 |
Profit for the year | - | - | - | 1,953 | 1,953 |
Other comprehensive expense | |||||
Currency translation differences | - | - | (68) | - | (68) |
Total comprehensive income for the year | - | - | (68) | 1,953 | 1,885 |
Group balance at 31 December 2010 and 1 January 2011 | 24,572 | 799 | (68) | 4,005 | 29,308 |
Loss for the year | - | - | - | (2,882) | (2,882) |
Other comprehensive expense | |||||
Currency translation differences | - | - | (3) | - | (3) |
Total comprehensive expense for the year | - | - | (3) | (2,882) | (2,885) |
Issue of shares | 7,000 | - | - | - | 7,000 |
Group balance at 31 December 2011 | 31,572 | 799 | (71) | 1,123 | 33,423 |
Consolidated Statement of Financial Position as at 31 December 2011
2011 | 2010 | ||
US$'000 | US$'000 | ||
Non-current assets | |||
Fixtures, fittings and equipment | 7 | 8 | |
Unquoted financial assets at fair value through profit or loss | 29,248 | 28,718 | |
Deposit | - | 8 | |
Total non-current assets | 29,255 | 28,734 | |
Current assets | |||
Loans and other receivables | 3,363 | 45 | |
Quoted financial assets at fair value through profit or loss | 176 | - | |
Cash and cash equivalents | 1,159 | 851 | |
Total current assets | 4,698 | 896 | |
Total assets | 33,953 | 29,630 | |
Current liabilities | |||
Other payables and accruals | 494 | 308 | |
Shareholder's loan | 36 | 14 | |
Total liabilities | 530 | 322 | |
Net current assets | 4,168 | 574 | |
Net assets | 33,423 | 29,308 | |
Equity and reserves | |||
Share capital | 31,572 | 24,572 | |
Share based payment reserve | 799 | 799 | |
Foreign translation reserve | (71) | (68) | |
Retained earnings | 1,123 | 4,005 | |
Total equity and reserves attributable to owners of the parent | 33,423 | 29,308 | |
Consolidated Cash Flow Statement for the year ended 31 December 2011
2011 | 2010 | ||
US$'000 | US$'000 | ||
Cash generated from operating activities | |||
(Loss)/profit before taxation | (2,882) | 1,953 | |
Adjustments for: | |||
Depreciation | 2 | 1 | |
Financing income | (274) | (140) | |
Fair value changes on unquoted financial assets at fair value through profit or loss | 1,671 | (2,869) | |
Fair value changes on quoted financial assets at fair value through profit or loss | 59 | - | |
Increase in receivables | (10) | (14) | |
Increase in other payables and accruals | 186 | 133 | |
Net cash used in operating activities | (1,248) | (936) | |
Cash flows from investing activities | |||
Acquisition of fixtures, fittings and equipment | (2) | (7) | |
Finance income received | 185 | 142 | |
(Purchase)/sale proceeds of quoted financial assets at fair value through profit or loss | (235) | 179 | |
Realised quoted financial assets at fair value through profit or loss | - | 679 | |
Sale proceeds of unquoted financial assets at fair value through profit or loss | 3,800 | - | |
Loans granted | (6,266) | - | |
Purchase of convertible bonds | - | (1,502) | |
Proceeds from repayment of loan granted | 3,055 | 578 | |
Net cash generated from investing activities | 537 | 69 | |
Cash flows from financing activities | |||
Net proceeds from issue of shares | 1,000 | - | |
Loan from shareholders | 22 | 5 | |
Net cash generated from financing activities | 1,022 | 5 | |
Net increase/(decrease) in cash and cash equivalents | 311 | (862) | |
Cash and cash equivalent at the beginning of the year | 851 | 1,717 | |
Effect of foreign exchange | (3) | (4) | |
Cash and cash equivalent at the end of the year | 1,159 | 851 | |
Notes to the Financial Information for the year ended 31 December 2011
1. Board Approval and 2011 Annual Report and Financial Statements
The financial information included in this report has been extracted from the Group Financial Statements for the year ended 31 December 2011 which were both approved by the Board of Directors on 22 June 2012. These Group Financial Statements have been prepared in accordance with the accounting policies set out therein and in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
The auditors have reported on the 2011 Financial Statements, their report is unqualified. The information included does not constitute the Company's statutory accounts. The full financial statements will be included in the Group's annual report.
2. Earnings per Share - continuing operations
The calculation of the basic and diluted loss per share attributable to the ordinary equity holders of the Group is based on the following:
2011 | 2010 | ||
US$'000 | US$'000 | ||
Numerator | |||
Basic/Diluted : | Net (loss)/profit | (2,882) | 1,953 |
No. of shares | No. of shares | ||
'000 | '000 | ||
Denominator | |||
Basic: | Weighted average shares | 70,134 | 12,757 |
Effect of bonus issue on 4 June 2010 | - | 51,028 | |
70,134 | 63,785 | ||
Effect of diluted securities: | |||
Share options | 1,336 | 1,718 | |
Diluted: | Adjusted weighted average shares | 71,470 | 65,503 |
In the current year the share options are anti-dilutive and therefore the weighted average shares in issue are 70,134,000.
3. Unquoted financial assets at Fair Value through Profit or Loss
Group 2011 | |
US$'000 | |
Balance as at 1 January 2010 | 23,911 |
Fair value changes through profit or loss | 2,869 |
Additions | 2,000 |
Effect of foreign exchange | (62) |
Balance as at 31 December 2010 and 1 January 2011 | 28,718 |
Fair value changes through profit or loss | (1,671) |
Additions | 6,000 |
Disposals | (3,800) |
Effect of foreign exchange | 1 |
Balance as at 31 December 2011 | 29,248 |
On 8 September 2008, the Group through CPE TMT Holdings Limited ("CPE TMT") acquired 37.1% of the issued share capital of Fortel Technology Holdings Limited ("Fortel"). This has been accounted for as financial assets at fair value through profit or loss as it is to be held as part of an investment portfolio. The Group will dispose of the shareholding upon approval by the investment committee which monitors the investment/divestment decision on an ongoing basis.
During the year ended 31 December 2011, Fortel repurchased 5,503 of the ordinary shares of US$0.01 in Fortel held by CPE TMT. CPE TMT retains a 33.6% stake in Fortel, from 37.1% previously. The Company also entered into an agreement to acquire a 30% interest in Hong Kong-based Enfinium International Holdings Limited ("Enfinium"), for an initial consideration of US$6 million during the year ended 31 December 2011. The consideration was settled by way of issuing 10 million new ordinary shares of no par value of the Company.
The Group adopted the recent investment methodology prescribed in the International Private Equity and Venture Capital Valuation ("IPEVCV") guidelines to value its investments at fair value through profit or loss. Applying the methodology, the Group has used the purchase consideration paid by third parties in the acquisition of new shares in Fortel and Enfinium as the basis to estimate the fair value of the investment in Fortel and Enfinium.
In November 2011, Enfinium allotted further shares to third parties ("Corporate Events"). Following the Corporate Events of Enfinium, the Company's interest in Enfinium was diluted from 30% to 24% and based on the above allotment price, a decrease in fair value of US$1,671,000 was recognised in the statement of comprehensive income for the year ended 31 December 2011.
There have been no further transactions occurring since the repurchase of Fortel's shares, which, in the opinion of the directors, provides evidence for the year end valuation.
During the year ended 31 December 2010, the Company entered into a subscription agreement with China iEducation Holdings Limited ("iEducation") to subscribe its guaranteed convertible note (the "Note") at a consideration of US$2,000,000. The major shareholder of iEducation is the guarantor of the Note. The Note was converted into 6,666 ordinary shares of iEducation in December 2011, representing a 40% interest in iEducation. As the Directors are not aware of any adverse elements that would materially affect the value of the shares, they consider the original cost is an appropriate valuation as at 31 December 2010 and 2011.
4. Posting of Accounts
The Company will post the Annual Report and Accounts for the year ended 31st December 2011 to shareholders shortly. The Annual Report and Accounts will also be made available on the Company's website at www.cpe-invest.com.