Lunar Capital Commentary


November E-Commerce Sales Show Strong Consumer

As we enter the year-end holiday season, the world’s two largest economies will generate tremendous levels of shopping both online and offline, bringing the sheer scale of China’s consumer growth into sharper focus.Double 11 – The online Chinese consumer is as healthy as ever Sales during November’s “Double 11” promotion reached 120.7bn yuan, or US$18bn, up 32% YoY. Chinese shoppers were enticed to build their shopping carts early, and in return were promised discounts and lightning...

Read more 2016-11-30 | Lunar Capital

Chinese SMEs Positioned for Growth

During our most recent Annual General Meeting, Lunar Capital Partner Robin Song led a group of investors to meet with the Chinese Association of Small-Medium Sized Enterprises (CASME) in Beijing to learn how public and private financing is helping small-medium sized enterprises move up the value chain to become listed enterprises on China’s domestic stock exchanges. SMEs in China possess local products and services, innovation and new technologies, but require investment capital to monetize their...

Read more 2016-09-30 | Lunar Capital

This century’s “baby boomers” are in China

China’s rising consumer middle class, driven by urbanization and rising per capita consumption levels will drive global growth and analysts estimate that the effect could be greater than that of the post-war baby boomers of the west. China’s working class, aged 15-59, is expected to swell by an additional 100 million people in the next 15 years and will bring domestic consumption from $2.5 trillion to 6.7 trillion, according to McKinsey research. These consumers are increasingly optimistic about...

Read more 2016-08-31 | Lunar Capital

Consumption Leading to a More Positive Experience with Family

As China addresses the sustainability of high growth rates and economic rebalancing away from export-and manufacturing-led growth, outlook for domestic consumers continues to grow increasingly positive as disposable incomes rise and unemployment remains low. China’s middle class, now more than 200 million, can afford basic necessities and are pursuing premium products and a well-balanced lifestyle with an emphasis on health, family, and “socializing” the shopping experience. Consumption...

Read more 2016-07-31 | Lunar Capital

China’s “Post-90s” Treat Consumption Markedly Different than Previous Generations

The largest consumer nation in the world, the U.S., was heavily influenced by the consumption habits of those born in the 50s and 60s – baby boomers. Similarly in China, strong consumption growth is now coming from dynamic spending habits of the post-90s generation (“九零后”). Like the baby boomer generation in the U.S., the post-90s generation is experiencing rising disposable incomes, increasing living standards, and possesses a positive future outlook. Historically, socio-economic and political...

Read more 2016-06-30 | Lunar Capital

Consumer Brands Are Creatively Communicating Through Modern Media

As China transitions towards consumption, brands are aggressively positioning marketing budgets towards modern media. Across the board, spending on new forms of media increased from 20% of marketing budgets in 2012 to 43% in 2015, and is expected to reach 60% in 2016. Modern media refers to content made available on the internet and mobile devices with rich user engagement, such as “gamified” content, which is often trackable in real-time. Modern media promotes active engagement and user interaction...

Read more 2016-05-29 | Lunar Capital

China's New Normal, Business as Usual

Chinese capital markets remain extremely volatile, and while 2016 has been off to a similar start for our businesses as last year, concerns about the reliability of official economic numbers in China, abilities of policymakers, transition to a consumer-led economy and strength of the rising middle class are prevalent. We still believe that China’s New Normal thesis remains intact, which will be driven by rising consumer spending, less fixed asset investment, and greater economic liberalizations...

Read more 2016-04-28 | Lunar Capital

Role of Chinese Private Equity in a Complex Environment

During the fourth quarter of 2015 and into the first quarter of 2016 as our teams assembled this report, Chinese capital markets were extremely volatile, with most equity-focused hedge and long-only funds reporting being down double digits. Despite these worries, we remain of the view that 2016 is starting out in a very similar fashion to the start of 2015 - far more “business as usual” than what the deep pessimism in the foreign press would otherwise suggest.   Our businesses ended the year...

Read more 2016-03-30 | Lunar Capital

The Design of Intelligent Cities are Changing Consumption in China

Multi-faceted efforts are being made to transition China’s economy from a reliance on fixed-asset investment to that of market-driven consumption. As announced with China’s 13th Five-Year plan, civil engineers are designing and developing “Smart Cities”. Under this plan, local and national governments are making targeted efforts to address urban resource shortages, pollution, traffic congestion and safety concerns, and aim to provide a toolkit for deeper issues such as a shortage of high quality...

Read more 2016-02-28 | Lunar Capital

Lunar 2016 Outlook Remains Positive

We started 2015 with enthusiasm for the Chinese consumer, A-shares generating 53% annualized returns, and healthy private equity performance. This year begins with severe pessimism about China’s economic transition, public markets all sharply lower, and private equity returns in question. One friend complained that his clients were demanding to know why anyone even still focuses on China, adding bluntly “why are you wasting your time?” So feeling a bit on the back foot, battered but not bruised...

Read more 2016-01-28 | Lunar Capital

Catching the Next Wave of Consumption Driven by Policy

It has taken China more than three decades of rapid urbanization and persistent high growth rates to get to where we are today, and the Chinese economy is now entering a “new normal” that requires sustained efforts to re-balance its fundamental economic structure to focus on stable, single-digit, growth driven by the consumer. Beijing’s recently announced "13th Five-Year Plan” aims to achieve a balanced and stable society, and reiterates the 2010 target to double GDP and GDP per capita income of...

Read more 2015-12-30 | Lunar Capital

Double 11 a record day for Lunar companies

November 11, or “Double 11”, is now the world’s largest e-commerce shopping day, when merchants offer steep discounts to entice online shoppers. Since its inception in 2009, the day has achieved explosive growth year after year, and market leaders like Alibaba’s Tmall's have drawn the attention of other players, including, Dangdang, Gome and Suning, and international competitors like Amazon to partake in the frenzy. "Double 11" has grown to epitomize the success and growth of China’s e-commerce...

Read more 2015-11-29 | Lunar Capital

Policy favoring intelligent investment

Robin Song, Partner in our Investment & Corporate Finance team, has worked closely with private and public enterprises throughout his career of more than thirty years in China. Having published articles and commentary on China with leading domestic publications, he has recently compiled a thought leadership article on the country’s current economic transition and its private equity investment environment. Below are select highlights from the working article, with the full Chinese language version...

Read more 2015-10-29 | Lunar Capital

Domestic Brands Winning Market Share

Over the next decade, we believe that Chinese brands will continue to extend market share by leveraging local tastes and presence. We believe this will be beneficial for our strategy of acquiring and developing mass-market premium brands that are familiar to, and resonate with, increasingly sophisticated Chinese consumers who are willing to pay more for better quality. Domestic brands continue to gain ground versus their multinational peers. According to a recent Bain report, local brands in...

Read more 2015-09-29 | Lunar Capital

Our Perspective on the Current Economic Situation and China’s Consumer

China may be undergoing a bumpy but managed landing but our operations suggest that the consumer remains on track.   The Chinese economy is not melting down. That notwithstanding, this shift has resulted in Asian market capital outflows that have driven valuations of certain key markets to levels not seen since the global financial crisis.    Deteriorating market sentiment is resulting from the realization that we are in the midst of a bumpy but managed landing. This is long-term better...

Read more 2015-08-30 | Lunar Capital

Advantages of a Sector Focused Approach

Over the past quarter, we have spent considerable time thinking through the current macroeconomic situation. Thankfully, our operations suggest that China’s consumer remains on track, and we remain cautiously optimistic that consumer spending will rise, companies with room for operational improvements remain good investments, providers of niche discretionary products will outperform, and the key drivers of our thesis will remain wage growth and urbanization.   Given our cautiously optimistic...

Read more 2015-07-30 | Lunar Capital

The Case for Buyout Private Equity in China

For the past 35 years, Chinese private businesses have been growing at full tilt, and now account for more than 75% of total gross industrial output. Many of these private companies originated from OEM manufacturing, and thrived in the export-driven economy of yesterday. Cheap labor, low entry costs, and a supportive currency allowed homogeneous competition to grow without check, and the pace of growth often raised environmental, social and governance issues, such as pollution and product quality...

Read more 2015-06-29 | Lunar Capital

Chinese Consumer Story Remains Strong

Analysts and party leaders are calling for a need to rebalance China’s development toward a consumption-driven economy, and move away from investment-led growth, which has slowed. Despite the gradual increase in number of China skeptics, we are confident that China remains the fastest growing consumer market in the world. A recent McKinsey report argues that consumption in China has grown faster than almost any other country on an absolute basis, growing from approximately $0.9 billion in 20...

Read more 2015-05-28 | Lunar Capital

Retail Rounding a Corner

Newspapers last year were littered with stories highlighting concerns about expanding retail inventories driven by short-sighted management chasing top-line growth. Blind expansion from 2006 to 2011 resulted in unstable inventory levels as total industry points of sale more than tripled, and EBIT margins dropped by close to half. Today, there are signs that the industry has turned a corner. Starting in 2012 brands began to curtail store expansion plans and started to close down poorly-performing...

Read more 2015-04-29 | Lunar Capital

The Mobility of Consumption

Mobile “on the go” shopping in China is becoming the norm - from researching products and discussing with friends to purchasing with a swipe of the finger. Mobile shopping is changing the way customers discover, research and ultimately buy products in China, primarily through 1) providing tools to conduct research while in-store, 2) creating robust platforms for marketing and real time customer engagement, and 3) allowing brands to inexpensively expand their customer reach. Our businesses are proactively...

Read more 2015-03-30 | Lunar Capital

A Growing M&A Culture

M&A activity in China reached record highs in 2014, with the consumer, technology and financial sectors leading the way. According to PWC, total M&A in China surged by 55% in both volume and value, with foreign strategics increasing their activity by 58% and domestics 63%. Last year’s M&A growth provided tailwinds for private equity in China and much needed liquidity for its investors. Exits by trade sale and M&A hit a record high in 2014, accounting for 37% of the total. Trade...

Read more 2015-02-26 | Lunar Capital

Lunar Capital Update: Achievements in 2014

Our achievements in 2014 continue to serve as a validation of our thesis, strategy and commitment to consumer-focused, operationally-intensive, control-oriented investments in China. Our most recent fund, Lunar Capital Partners-III, is now fully invested with strong prospects for further valuation gains and distributions. Our apparel investment, Yeehoo, ended 2014 with revenue and earnings up significantly, positive margin improvement and e-commerce growth driven by channel expansion, product...

Read more 2015-01-29 | Lunar Capital

A Process for Delivering Strong Risk-Adjusted Returns

We believe that robust, well-governed processes are critical to source, acquire and build better businesses in China’s growing consumer market, and will allow us to generate stronger risk-adjusted returns. Our investment process follows ten-stages that emphasize timeline, control, discipline, transparency and results. We aim to leverage our resources and experience running Chinese consumer companies, monetize sweat equity and manage downside risk. We identify and map target sectors to proactively...

Read more 2014-12-30 | Lunar Capital

Investing in the Chinese Consumer: The Scale of the Opportunity

The scale of investment opportunities in consumer industry in China is growing, and we believe that Lunar offers an attractive proposition to the owners of businesses that we acquire. We provide a solution that is operationally oriented in the belief that transitioning businesses to professional management unlocks the potential for tremendous value creation, and we share upside with founders by allowing them to retain a significant minority stake in the company. The reception to our proposal has...

Read more 2014-11-29 | Lunar Capital

Changing Consumer Landscape Creating Opportunities

Traditional consumption norms in China are being challenged by evolutions in technology, modern habits and innovative product-experiences that affect how consumers evaluate, select and pay for goods and services. Today, Chinese consumers have higher and higher expectations – they focus on quality and safety, are becoming brand-centric and consume across multiple retailing channels, and pay with cash, credit cards and even virtual currencies. This is creating enormous opportunity. Bain recently...

Read more 2014-10-29 | Lunar Capital

Lunar Capital 2014: Progress to Date

We believe the coming decade will be marked by an emergence of individuality, a shift from savings toward consumption, and government policies that support the growth of a strong consumer-led economy. Managing these changes is a challenge for the consumer businesses that we target for investment. The recent slowing of growth, in addition to scarcity of credit, has resulted in the need for a different approach to managing consumer businesses. Businesses solely reliant on growth will face particular...

Read more 2014-09-29 | Lunar Capital

Consumer Trends in China’s Beverage Industry and Opportunities to Invest

Recently we wrote about our industry-insider approach to sourcing, which we believe provides a unique and growing pipeline of consumer opportunities by narrowing our focus on subsectors where we see strong brands, low penetration buyout rates and healthy margins. Within these subsectors we map out leading companies and approach businesses that score well on key success factors that we have determined from our operational insight. In China’s beverage industry, health-functional drinks are an attractive...

Read more 2014-08-29 | Lunar Capital

Sourcing Chinese Consumer Transactions

Our investment management process begins with our unique approach to sourcing transactions in our focus industries. The key component to our sourcing methodology is an industry insider approach: our management expertise and operational involvement in fast moving consumer goods (FMCG), apparel, accessories, specialty-retailing and related sectors provides us with the ability to identify and capitalize on  opportunities sourced from multiple channels. We focus on Chinese consumer businesses, and...

Read more 2014-07-27 | Lunar Capital

Delivering Value Creation

Much of the discussion of our operational involvement in our portfolio revolves around growing top line revenues, controlling costs and streamlining decision making. These are goals that we must drive through deeper, more granular involvement in our companies.  This month we highlight some of the areas for improvement within our businesses that have been particularly low hanging fruits.Product R&D We see improvements through research and development and distribution channel...

Read more 2014-06-29 | Lunar Capital

Maximizing Value through Building Platforms

Platform-building is woven into Lunar’s DNA. The business that began as Linktone in 1999 subsequently gave birth to two further companies, Intrinsic and SmartPay. Together they formed the bulwark of Fund I and each of the three has now been fully exited, generating attractive returns. Another platform-building opportunity arose when we acquired Yeehoo in 2011. The move was true to our core consumer belief that China is undergoing a steady migration toward higher quality branded products across...

Read more 2014-05-29 | Lunar Capital

Incentivizing Minority Shareholders in a Buyout Deal

Chinese private equity has been overwhelmingly characterized by pre-IPO deals and growth capital investments whereby PE returns were driven by the deployment of investment capital, not human capital or sweat equity. Most firms lacked the culture, will and expertise to take on operationally challenging investments. Meanwhile the scale of buyout opportunities has grown, driven by (1) generational and succession issues, (2) rising levels of mergers and acquisition activity; (3) founders acknowledging...

Read more 2014-04-24 | Lunar Capital

A Solution to Stress and Succession

Stressed out sextuginarian and septuginarian entrepreneurs are saddled with succession issues, as are their quadregenriarian and quinquagenerian brethren. A 2013 survey of privately-held small- and medium-sized private enterprises conducted by Shanghai Jiaotong University found that 70% will face succession issues within the next five to ten years, and less than 20% of next-generation heirs and heiresses are willing to take on the responsibility for running their companies. Stress is compounded...

Read more 2014-03-19 | Lunar Capital

Seeing Shadows in the Dark? Fear Not for the Consumer

Inclusive of government, corporates and households, China’s debt to GDP ratio rose to 218% at the end of 2013, up from 87% in 2008. In response we have seen growing fears about credit addiction, with the State Council in December 2013 issuing guidelines for more aggressive regulation of the shadow banking sector. This pessimism has affected valuations. ICBC now trades at 4.8x forward earnings. Most are aware that we have always shared concerns about the valuation of Chinese financials, but what...

Read more 2014-02-19 | Lunar Capital

The Year of the Steady Stallion

Lunar Capital characterized the Year of the Dragon (2012) as the Year of the IPO Hangover*, as the domestic economy shuttered, domestic IPOs were suspended, and high prices paid by growth capital firms contributed to a sizable correction in public market valuations. These past twelve months - the Year of the Snake - was cleaning out the liquor cabinet and getting out the running shoes. Although the Shanghai Stock Exchange Index remains at historically low levels, with PE ratios hovering around...

Read more 2014-01-19 | Lunar Capital

The Peng Dynasty

In March of 2013, Liyuan Peng, appeared before the media spotlight for the first time as China’s new first lady. While she is a well-known folk singer, she used her new role to signal support for China’s continued drive toward domestic innovation and consumption – through fashion. Peng’s outfits were simple and elegant, and rather than from current foreign favorites like LV or Dior, came from a local brand -- Exception de Mixmind. Peng’s chic image, an inspiration for mature Chinese women, will...

Read more 2013-12-15 | Lunar Capital

E-Commerce in China – An Update

Recently, we opined on the challenges for e-commerce in China, particularly with regards to trust, privacy, payments and logistics. We noted the distinctive characteristics of the Chinese e-commerce ecosystem, credited online platforms for providing convenience and choice, but expressed concerns regarding profitability. A year has passed and despite superlative growth in volumes, profitability remains unclear and questions about how traditional and e-commerce retail formats will work together in...

Read more 2013-11-16 | Lunar Capital

Burgeoning Bourgeois

The Chinese government has delivered on its promise of creating wealth for the masses, giving consumers purchasing power unimaginable even a decade ago. A recent study by McKinsey stated that the number of upper-middle class households with income between RMB 106,000 and RMB 229,000, has grown from 6% of urban household in 2010 to 14% in 2013. While the number of middle class households still outnumbers the upper-middle class, accounting for 54% of the total, McKinsey estimates that roughly 40...

Read more 2013-10-16 | Lunar Capital

Shopping with Billions

Chinese are going shopping with export-accumulated wealth again. This time the target is more aspirational. Rather than Louis Vuitton bags and Prada shoes, they are putting part of the USD 3.5 trillion in foreign reserves to work by acquiring billion-dollar companies. China’s appetite is growing for large, established foreign companies. Unlike Japan’s 1980s-era acquisition of trophy real estate, China has been cautious in overseas expansion, focusing mainly on strategically important natural...

Read more 2013-09-15 | Lunar Capital

The Evolution of Retail Formats in China

China’s retail format is evolving as Chinese consumers grow wealthier and savvier. To generate sustainable growth going forward, businesses need to upgrade their retail platforms. Generally speaking, in developed markets where GDP per capita reaches USD 8,000, new retail formats, such as supermarkets, shopping malls and hypermarkets tend to become more attractive to consumers. China has now reached this inflection point. In 2011, GDP per capita for first tier cities, such as Shanghai, Beijing...

Read more 2013-08-14 | Lunar Capital

Control Over Our Destiny

China’s CSRC recently undertook what the private equity industry has dubbed the harshest IPO approval process in history. After an eight month freeze, the CSRC suspended the IPO application of 269 companies, almost 1/3 of the 900 companies in queue. This heavy-handed approach dealt a blow to the IPO dreams of many PE firms and entrepreneurs alike. LPs that were promised handsome and unrealistic returns are now left holding the bag, and while some are optimistic, we remain skeptical about the near...

Read more 2013-07-14 | Lunar Capital

The Rise of the Blue Collar Consumer

The Chinese economy give labor leverage – in other words, rising wages. This is resulting in a visible redistribution of wealth and an increasing number of blue-collar consumers entering the marketplace. The One Child policy has begun to take its toll on China’s labor force. Although China’s population has remained relatively stable – 1.36 billion people today versus 1.19 billion 20 years ago – its working age population has peaked, dropping by 3.45 million in 2012 to 937.3 million people. In...

Read more 2013-06-16 | Lunar Capital

Silver Linings in the Clouds Hanging Over the IPO Market

We believe there is a silver lining to the cloud hanging over the initial public offering malaise. Positive side effects include far more rational expectations of shareholders and entrepreneurs, and a corresponding increase in mergers and acquisitions. We believe this is a further signal that control and value creation will be rewarded. Growing Pains The Chinese government enacted the Stock Trading Reform for Listed Companies in 2007, which liberalized the trading of previously...

Read more 2013-05-14 | Lunar Capital

Private Enterprises and Debt Markets in China

One of the biggest challenges for small- and medium-sized private enterprises in China is debt financing. A recent study conducted by Development Research Center under the State Council showed that while 66.7% of the SME see bank loans as the primary source of financing, more than 62% of the SMEs are unable to acquire them, effectively limiting their ability to improve product quality and invest in new technology. However, recent reforms allowing for private placement bond issuance may begin to...

Read more 2013-04-14 | Lunar Capital

Two Meetings, One Goal: Rebalancing Toward a Richer Consumer

In China’s recent Liang Hui -- the annual meetings of the National People's Congress and Chinese People's Political Consultative Conference -- raising the size and living standards of the middle class were the primary policy objectives. China believes the answer is to urbanize, raise disposable income, and widen the social security net. These new policies fuel our desire to build businesses that deliver products and services to a larger base of wealthier and more discerning consumers in China,...

Read more 2013-03-14 | Lunar Capital

Investment Snapshot: China’s Dairy Industry

Given the increase in food safety awareness, China’s dairy sector has attracted renewed interest as the reality takes hold that scandals will push consumers toward buying products from larger, branded players. In seeking out attractive consumer businesses, we have looked at a number of dairy companies. Many have had challenging histories. Consumer spending patterns for milk products have historically favored cheap products, making it uneconomical to implement the necessary quality control process...

Read more 2013-02-14 | Lunar Capital

The Year of the Hangover

“… it was the age of wisdom, it was the age of foolishness… it was the spring of hope, it was the winter of despair… - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” -Charles Dickens, A Tale of Two Cities The year of the Dragon was also the year of the IPO hangover. While Lunar has been fortunate to generate three exits, they were primarily through...

Read more 2013-01-14 | Lunar Capital

Private Equity Outlook - Auspicious Signals from the New Leadership

The news cycle this fall was dominated by the change in leadership of the Chinese Communist party ahead of next year’s government transition. The initial signs emerging are encouraging and support our thesis about China’s development into the next decade. Most reports highlighted the efforts that incoming President Xi Jinping and Prime Minister Li Keqiang are expected to make on economic and judicial reforms along with initiatives to reduce corruption. Additionally, the incoming leadership provided...

Read more 2012-12-16 | Lunar Capital

The Implications of Rising Disposable Incomes in China

This month we examine the impact of rising disposable income in China. Chinese disposable incomes grew at a CAGR of 19.3% from 2008-2011. Over the same period, nominal GDP grew at a CAGR 14.6%. A stronger consumer class, driven by higher wages, is emerging while the old model of export-led growth is no longer viable. Growth in disposable income since 2008 has outstripped nominal GDP growth in all but one year, as Table I shows. Although four years is too limited a period to draw any concrete...

Read more 2012-11-16 | Lunar Capital

E-Commerce, with Chinese Characteristics

Rising Chinese consumer demand is evident is e-commerce, or more specifically, online retailing. While this sector has not been a direct focus of our investment activity, it is an important and growing distribution channel for many brands and products produced by our portfolio companies. As the marketplace evolves, beneficiaries are becoming apparent – notably, brands and customers. Challenges are also becoming apparent for online retailer’s reputations, shareholders and logistics providers. Meanwhile...

Read more 2012-10-14 | Lunar Capital

Beijing's Bicycle Rolls Onwards

What a difference 18 months makes In March 2011, we commented that investors were paying irrationally high valuations for PIPE and pre-IPO investments where the opportunity to add value was negligible. Companies listing on the ChiNext achieved valuations of one-hundred times their aggressive earnings forecasts. Venture firms were using Facebook as a comparable for Chinese startups. Sany Heavy Industries, a benchmark A-Share listed company, traded at twenty-eight times earnings...

Read more 2012-08-14 | Lunar Capital

Lunar Monthly Update

Investors are pulling money out of China. The Wall Street Journal recently reported that China’s banks were net sellers of renminbi in July. Asset prices are declining in line with these outflows. The Shanghai Composite Index is down 17% compared with a year ago. Housing prices have fallen – anywhere from 8% in wealthier cities like Hangzhou, to nearly 20% for new developments in Tier 2 Cities. Capital Vue estimates that capital raising by Chinese firms has fallen 35% versus...

Read more 2012-07-15 | Lunar Capital

Lunar Monthly Update

This month, we address the issue of transparency in general, and additionally why we believe operational involvement provides us an edge both in managing our portfolio and understanding the Chinese economic environment. The latest Chinese CPI, PPM and growth numbers have indicated a general slowdown in activity. Doubts about the credibility of economic information, and concerns that actual data may be worse than reported, have again brought the issue of transparency to the forefront. Lack of...

Read more 2012-06-14 | Lunar Capital

Market Update - The Hidden Affluence of Chinese Households

This month we examine an important question in understanding the power of the Chinese consumer. Is the level of consumption higher than government data suggest, and are China’s rich being captured by official statistics? A recent China Daily editorial called on the Chinese government to enact measures to ease personal tax burdens, break up monopolies and promote the free flow of economic resources, thereby making the country “more attractive to its talent”. The editorial cites a survey conducted...

Read more 2012-05-14 | Lunar Capital

The Tribe of Empty Wallets at Month’s End

There’s a unique scene that plays out almost every afternoon at the Canadian – US border crossing near Vancouver. If you drive by the US side at around 4pm, there’s a good chance you’ll spot tour buses, with rows of expensive-looking clothing neatly arranged up on the ground. Behind these Burberry, Hugo Boss, and Brooks Brothers shopping bags are Chinese tourists patiently waiting for their purchases to be taxed by customs agents. On some days you may even spot Lunar team members – many of us call...

Read more 2012-04-15 | Lunar Capital

Lunar Monthly Update

The past few years have forced policy makers in North America and Europe to re-examine the role of governments in guiding and promoting economic development. China’s relative success over this period has led some to speculate that the “China Model”– a strong central state driving economic development sans democratic discourse (or bickering) – might work best. While we believe the China Model is nowhere as simple, or as effective, as some commentators might suggest, we do think it can be put to...

Read more 2012-03-14 | Lunar Capital

China's Bloated Stomach

This month we would like comment briefly on the troubles facing China’s food and beverage sector and its related industries. From its well-known scandals of melamine in milk (2008), gutter oil in restaurants (2009), and clenbuterol in pork (2011), to its bizarre incidents of hair-made soysauce (2004), paraffin-coated rice (2006) and glue-injected shrimp (2012), the Food and Beverage (F&B) sector in China has always had a troubled past. While the Western media is often critical of China...

Read more 2012-02-14 | Lunar Capital

Lunar Monthly Update

Below are a few observations on the current economic and investment climate in China. Historically, investors have been rewarded by deploying capital in Chinese equities on the cusp of a transition from tight to loose monetary policy. We believe investors willing to withstand short-term risk will be rewarded. By any measure, public equity valuations appear cheap and have dropped substantially since their high in mid-2009 (Graph 1). Liquidity remains tight, after more than 18 months of strict...

Read more 2012-01-15 | Lunar Capital

Lunar Monthly Update

As we ring in the New Year, it’s déjà vu all over again in China, with market volatility giving rise to investor concerns. With this backdrop, we’d like to offer Lunar Capital’s reflections on the past and beliefs for the future. The first generation of private equity in China, or Chinese PE 1.0, was driven by tremendously successful private entrepreneurs who, with limited capital and negligible bank support, built businesses that now account for 60% of China’s economy, and remain a primary driver...

Read more 2011-12-14 | Lunar Capital

Lunar Monthly Update

This month we would like to comment briefly on China’s macroeconomic environment. Recent economic data (Table 1) suggests the risk of a slowdown in 2012 is real. Compounding this is concern over the health of Chinese banks, non-performing loans within both the public and private sector, a deflating property market, and a slowdown in capital markets activity. This is a challenging situation for policymakers, and as we stated during our AGM, China faces substantial headwinds. • China’s non-manufacturing...

Read more 2011-11-14 | Lunar Capital

Agriculture and Agribusiness in China

At our recent AGM, we discussed our belief in consumer goods, consumer services and agribusiness. We believe that demand in these areas will be driven by expanding domestic consumption, and in particular new consumption arising from the development of central and western China. Agribusiness is a sector where we are devoting considerable resources, including the majority of our Chengdu team’s efforts. Demand for meat products has risen at a CAGR of 5% over the past 3 years. Morgan Stanley forecasts...

Read more 2011-10-16 | Lunar Capital

Lunar Monthly Update

Summary: Investors in China are experiencing a crisis of confidence driven by three concerns – corporate malfeasance, credit conditions and the macroeconomic environment. Good opportunities often emerge when confidence is low, and we remain confident in three long-term trends: the emergence of better-run companies, a growing consumer base and more equitable credit conditions. Lunar believes that finding and leveraging these opportunities will require focus and operational expertise. China is...

Read more 2011-09-14 | Lunar Capital

Lunar Monthly Update

We believe the current environment for private equity investment in China is more compelling than it has been for the past several years. • Global fears have driven valuations lower world-wide. Chinese equity markets have performed poorly. Liquidity has tightened in China as policy makers address inflation, and volatility has risen. • This is the perfect environment for investors who can provide stable, long term capital and a commitment to driving value creation. • In many ways, the current environment...

Read more 2011-08-14 | Lunar Capital

Lunar Monthly Update

Our attention this month is focused on the second wave of the financial crisis and its potential impact on China. Risk of Contagion China weathered the first wave of the financial crisis well. We believe this was due to the "bottoms up" nature of the crisis — a break down in the availability of credit and skyrocketing counterparty risk. As the Chinese system was far less intertwined with global counterparties than other major economies, maintaining liquidity and consumer sentiment...

Read more 2011-07-14 | Lunar Capital

White Elephant Hunting en route to West Lake

"I was recently in Shanghai and I took their high-speed train to Hangzhou. The brand new high-speed train is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou. There is no rationale for a country at that level of economic development to have not just duplication but triplication of those infrastructure...

Read more 2011-06-14 | Lunar Capital

Lunar Monthly Update

We remain confident that China is attractive for private equity investors. Long-term growth prospects remain robust, driven by ongoing urbanization, rising consumption, and the emergence of inland China. Capital markets continue to develop, broadening exit opportunities for private equity investors. Financing channels for private enterprises remain scarce, making private equity an attractive source of liquidity for many entrepreneurs. Since late 2010, we have seen increased concern over inflation...

Read more 2011-05-15 | Lunar Capital

Lunar Monthly Update

Transactions involving control are rare in China, and for the most part, unpopular. According to research by McKinsey & Company, buyouts accounted for just 17% of private equity investment from 2005 to 2010. Their rarity has stemmed, in part, from legitimate factors, including a historically complex government approval process, the reluctance of first-generation entrepreneurs to cede control, and the limited availability of debt financing in China. We believe other, less valid reasons have led...

Read more 2011-04-14 | Lunar Capital

Lunar Monthly Update

IPOs have been the dominant exit form in China since 2007, creating an “IPO-or-Bust” mentality among the Chinese private equity community that is characterized by an overwhelming focus on public markets. A corollary has been the “Pay-up-for-PIPES” trend. From 2005-2010, PIPE or Mezzanine/Pre-IPO transactions have accounted for over half of private equity deals in China, with another 25% being growth capital transactions predicated, for the most part, on a near-term listing (see Table 1). These transactions...

Read more 2011-03-14 | Lunar Capital

Lunar Monthly Update

Inflation is probably the largest, and most rational, challenge facing the Chinese economy today. We anticipated inflationary pressures while constructing the portfolio for our previous fund, LCP-2, and LCP-3’s initial investments in Pineapple and Jaw reflect, and are arguably benefitting, from this environment. As we embark on building the remainder of LCP-3’s portfolio, our stance is that inflationary pressures are manageable but real, and that the opportunity to find attractive businesses at...

Read more 2011-02-14 | Lunar Capital

Lunar Monthly Update

We have been following the development of China’s 12th five year plan (2011-2015) with interest, as central government policy is a key driver of China’s economic development and the ability to align investment goals with high-level state objectives has generally been a positive tool for strategic planning. The plan will be announced in March and is expected to outline the following key objectives: • Increased focus on domestic consumption • Policies to encourage income redistribution and social...

Read more 2011-01-16 | Lunar Capital