JUN.11 '87 10:47 IMF WASH DC RAPICOM6300 477-7491
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I. PROJECT CONCEPT AND DESCRIPTION
P.009
1.01
In the period from 1979, when China opened its doors to foreign investment, to 1985 there were approximately 2,300 equity joint ventures and 3,750 contractual joint ventures approved in The People's Republic of China (PRC). While these aggregate approval figures indicate a considerable opportunity for foreign investment in the PRC, many of these projects were relatively small in size (more than 90% of the equity joint ventures involved total project cost of less than US$10 million equivalent) and most of the foreign partners were from Hong Kong/Macau. In some respects the predominance of Hong Kong/Macau investors reflects the number of difficulties of doing business in the PRC (e.g. unclear legal structures, government bureaucracy, etc.), which are especially difficult for foreign investors not familiar with the "Chinese environment".
1.02 This proposed project, JF China Investment Company Limited (CIC, the Company) will seek to identify, promote, structure and invest in medium-sized projects (total capital less than $10 million). The Company is expected to have a number of locational and strategic advantages in seeking to meet its objectives. Operating out of Hong Kong it will be at the source of much of the joint venture investment activity in the PRC and close to several of the PRC's Special Economic Zones (SEZ), which have been the locations for most joint venture projects. CIC's sponsors are very strong and experienced, with excellent connections in Hong Kong and throughout China. The Company's size (US$20-30 million) makes it sufficiently large to attract and support a small but adequate management and to achieve an adequate portfolio distribution and diversity, while at the same time it will be small enough to be flexible and responsive to project proposals. addition, because of its greater operational flexibility and its association with the Jardine Matheson Group, as one of its principal sponsors, CIC may also be in a position to identify and take advantage of a variety of other commercial and financial opportunities such as compensation trade, leasing (and other financial intermediation) and licensing and agency arrangement, which are not normally open to investment companies.
In
1.03 While CIC's principal focus will be on investment opportunities emanating from Hong Kong, the Company also expects to be able to participate in some "international" deals in China which may come to it through its own network of contacts, including its shareholders, which are expected to include European, American and Japanese institutions in addition to its Hong Kong sponsore. Tho Company may be in a position to play an especially important rale la such projecta, where its expertise on duing business in China will be uniquely valuable. Because of its own limited resources, CIC will not normally participate in larger projects in which its own investment would be insignificant. However, with IFC and other financial institutions among its shareholders, the Company may be able to assist in bringing together sponsors of larger projects with prospective investors.
1/
In the PRC context, "contractual joint ventures" are actually contractual arrangements in which the liabilities, rights and
obligations of each contracting party are stipulated. They may or may not involve the establishment of a separate legal entity (i.e. company) in the PRC.
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P.010
1.04
Working closely with the project's sponsors, IFC has played an important role in helping to establish the structure of the project, the investment and operating policies and role of the management company. Several of the prospective investors have also indicated the IFC's involvement in the Company has been a definite, positive factor in their own assessment of the project. With its capacity to promote and invest in smaller projects in the PRC, CIC will complement and parallel IFC's own efforts to accelerate the transfer of technical and managerial know-how to China.
II. THE SPONSORS AND THE COMPANY
The Sponsors
2.01
The principal sponsor of CIC is Jardine Fleming Holdings Limited (JF), a 50/50 joint venture between Jardine Matheson Holdings Limited (JMHL), a Hong Kong based international trading company, and Robert Fleming Holdings Limited, a London based investment bank which is the largest investment management group in the United Kingdom. JF, which was established in 1970, was the first merchant bank in Hong Kong.
2.02 In addition to its normal investment banking activities throughout the Far East and Australia, JF already has significant on-going involvement with the PRC, including investment advisory services for existing and prospective foreign investors, and the management of Chine 2000, a recently established unit trust for French investors focusing on companies doing business in China. In addition, JF has full time staff engaged in tracking and monitoring business, commercial and political developments in the PRC and publishing a monthly "China Newsletter", which is widely distributed to subscribers in Hong Kong and internationally.
2.03 Jardine Matheson was established in Guangzhou (Canton) in 1832 and moved its head office to Hong Kong in 1841. Since then it has grown Lo be a major international trading and investment company with interests in engineering and construction, financial services, marketing and distribution and transportation services. Through its shareholding in Hongkong Land Group it also has substantial property, food and hotel interests. Jardine Matheson Holdings Limited was incorporated in Bermuda in 1984 and is listed on the Hong Kong Stock Exchange. JMHL'6 consolidated net worth exceeds US$0.6 billion.
2.04
Jardine Matheson maintains offices in Beijing, Shanghai and Guangzhou with a staff of approximately 40 and is regarded as the principal "China Trader" in the region. It also has a number of existing investments as well as trading and commercial ventures in the PRC.
2.05 JF's investment in CIC is expected to be US$3 million. In addition, JF will be the majority shareholder in the proposed management company, which will provide management for CIC. (See para. 2.09 below.) The Chairman of CIC is expected to be the Managing Director of Jardine Matheson, Mr. M.G. Barrow.
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P.011
The Company & Financial Plan
2.06 CIC was incorporated under the Companies Ordinance in Hong Kong in March 1987. The proposed Financial Plan is as follows.
Subordinated Debt
Subordinated Loan Stock (0% interest)
Amount US$ 20,000,000
Share Capital
Management Company
Other Shareholders
50,000 (20%) 200,000
(80%)
SUB - TOTAL
TOTAL FUNDS AVAILABLE
250.000 20,250,000
Except for the management company, all of the other shareholders, including IFC, will also take up US$100 of zero interest Subordinated Loan Stock for each US$1 of share capital subscribed, resulting in a total Loan Stock of US$20 million. (As noted in para. 2.07 below, the share capital and Loan Stock may be increased by up to 50% if all of the prospective investors confirm their intention to participate.) The terms of the Subordinated Loan Stock will provide that no dividends may be paid on the ordinary shares until the Subordinated Loan Stock is fully repaid and, while there will be no fixed repayment schedule, the Company will be obliged to apply 50% of the net realized and recovered profit each year to repay the loan stock. Based on the forecasts attached, the subordinated Loan Stock, which represents 99% of the original investment, would be fully repaid in approximately eight years. (The Subordinated Loan Stock is generally regarded as equity. However, as Loan Stock, it provides somewhat greater flexibility to the Company and its shareholders because, compared to share capital, loan stock can be more readily redeemed by the Company.) Initially, the right to transfer the shares would be limited in that the other shareholders would have a "right of first refusal" on any shares offered for sale, and any transferee would have to be acceptable to the Board of CIC. However, the sponsors have indicated that the Company will seek a public listing of the shares at the earliest appropriate time.
2.07 While none of the investors is fully committed at this stage, all of the investors listed below have indicated serious interest and have indicated clearly the amounts of their participation:
PROBABLE INVESTORG
Share Capital
Luau gluck
US $ '000
Jardine Fleming Group
30
3,000
Kuwait Investment Authority
50
5,000
IFC
30
3,000
Connecticut Mutual Assurance Co.
30
3,000
Yasuda Trust & Finance Ltd.
20
2,000
Girozentrale (Vienna)
20
2,000
SUB-TOTAL
18,000
In addition, several other prospective investors have expressed some interest. If all of these ultimately confirm their intention to