Vol. 47 August 31st , 2015

Latest Report

The Report on Return of Chinese Enterprise with VIE Structure to A-share

Market 2015 Staged out; A-share Market Slump Does Not Hold back Return of

China Concept Stocks with VIE Structure to China

By Wu Meng , Zero2IPO Research Center

The “variable interest entity” structure (the “VIE” structure), or agreements-based control, ever helped many Chinese enterprises get listed overseas and fueled China Concept Stocks to go public in the US capital market. However, as time goes by, everything may change. 15 years has passed since Sina’s IPO in the US under the VIE structure. Nowadays, China’s overseas listings are inflicted by small valuation, less understanding of internal business models by foreign investors or low stock prices under the pressure of overseas short sellers. Attributed to such factors as high valuation and favorable policy in China, many companies with VIE structure returned to China, and China Concept Stock companies tended to be privatized in succession. In this context,Zero2IPO Research Center recently published the Report on Return of Chinese Enterprise with VIE Structure to A-share Market 2015, which summarized and analyzed the policy background, operation methods and major risks of VIE-structure companies’ return to China and influence on the market reform as well as provided a detailed case study on three representative enterprises, such as Beijing Baofeng Technology Co., Ltd., Tianya.cn and Focus Media, for reference of VIE-structure companies and investors.

Frequent Favorable Policies Welcome Returned VIE-structureCompanies

2

Table 1 List of Policiesand News of Promoting the Return of VIE-structure Companies to China

Source:Public Data Compiled by Zero2IPO Research Center, Jul. 2015 www.pedata.cn

Since last year, Chinese regulatory authorities have constantly released good news about embracing the return of China Concept Stock companies, showing the firmly supportive attitude of the domestic regulatory authorities. The anticipation for the implementation of the registration system and Strategic Emerging Industry Board is incredibly attractive to the return of China Concept Stock companies. The registration system emphasizes that the Chinese regulators will no longer conduct a substantive review over the companies to be listed, which means that the threshold for getting listed has been lowered significantly. Meanwhile, the Strategic Emerging Industry Board focuses on the enterprises in

3

emerging industries and innovative enterprises, and plans to implement differentiated listing conditions and systems. Recently, the meeting of the State Council particularly emphasized the importance of promoting the startups with a special structure of stock right in getting listed domestically. Although the detailed rules are still not identified, the trend is crystal-clear.

To return the A-share market, China Concept Stock companies shall go through three main steps: delisting, dismantling the VIE structure and offering A shares; and unlisted VIE companies shall go through two main steps: dismantling the VIE structure and offering A shares. Getting back to A-share market, for all, is a complicated, time-consuming project requiring luxurious time and money, i.e.one to three years. What’s more, sensitive to the interests of all the parties, it may come to a deadlock anytime.

Figure 1 Process Flow and Time Needed in Removal of VIE Structure andReturn to A-share Listing

Sufficient Funds and Repurchase Price Are the Key to Delisting

The delisting process of US-listed companies include: step I: Offer or (usually the company’s senior executive or external strategic investor) proposes an offer to the company’s board of directors; step II: The Board of Directors sets up an ad hoc committee which shall engage legal and financial consultants to assess the offering price, go through relevant procedures, perform due diligence investigation and issue professional opinions for the ad hoc committee; step III: The ad hoc committee and the

4

substantial shareholder shall negotiate with the offer or about M&A price, terms and conditions and other detailed points; step IV: The company will convene an extraordinary shareholders’ meeting to vote upon the M&A agreement; and step V: Alongside the completion of privatization, shares stop trading and the company delists.

Dismantlement of VIE Structure Depends on Pricing

In general, to dismantle the VIE structure, a company shall: I. To properly decide on whether to retain or remove overseas investors; II. To sign written agreement to terminate all VIE control agreements; III. To restructure domestic operating entity; IV. To terminate overseas employee stock ownership plan; V. To cancel or transfer overseas SPV and cancel foreign exchange registrations of domestic residents who have made return investment via overseas SPV.

VIE-structure Companies Shall Select Appropriate Channels to Return to A-share Market According to Their Actual Conditions

Overseas China Concept Stock companies and unlisted Chinese companies which have dismantled the VIE structure may choose three ways to get listed on the A-share market: IPO; listing on New Third Board and moving to other boards at an opportune time; and back-door listing.

It can be found that IPO requires longer time, higher requirements and stricter and more complex application procedures. Of course, it has merits as well, e.g. clearly-cut equity structure and independent listing. However, due to acutely violent stock market, the regulatory authority has decided the suspension of IPO. Therefore, IPO is fit for large-sized China Concept Stock companies or unlisted companies with a long operating history, clear evolution process and ample funds which are not eager to get back to A-share market.

The listing on New Third Board requires lower threshold, simpler process and shorter time. The companies which are not capable enough of making IPO can be listed on New Third Board and seek for good opportunities in the future for listings on other boards. SMEs having a shorter history and poorer profitability may seek for listings on New Third Board.

Compared with IPO, the management over back-door listing is relatively loose without a set of restrictions upon the listing process, and the listing costs a short period (usually six months) and less money. But the assets and personnel of the target shall be restructured, which is exposed to certain risks. On the whole, back-door listing is fit for financially capable enterprises which hope to be listed on the A-share market in a short period of time. Currently, IPO has been suspended by the regulatory

5

authority. So China Concept Stock companies may find back-door listing an ideal way to get back on the A-share market directly.

RMB Funds and Intermediaries Give Great Impetus

RMB funds are active in embracing the return of China Concept Stocks. China Longteng Return FOF is launched in May 2015 with a size of RMB2.00B and will focus on the return of the companies with stock innovation. Gopher Asset, an assets management platform under Noah, is preparing the launch of a RMB fund worthRMB3.00B-RMB5.00B to assist Chinese enterprises in dismantling VIE structure and returning to China’s capital market.

In addition, the intermediaries such as law firms, accounting firms, investment banks and securities companies will have a bright prospect amid the return of China Concept Stock companies. In early June2015, Sequoia Capital and Huatai Securities jointly established the industry buyout fund worth RMB10.00B, with its core investment strategy focusing on the return of China Concept Stocks and red chip shares. In mid-June 2015, Guosen Securities signed the strategic cooperative agreement with nine Internet investors, namely, Zero2IPO Group, China Renaissance, SAIF Partners, IDG Capital Partners, Matrix Partners, Sequoia Capital, Oriental Fortune Capital, QF Capital, and Green Pine Capital Partners. So far, all the domestic securities companies in the first camp have strategically set their target at China Concept Stocks from overseas market.

A-share Market Slump Does Not Hold back Return of VIE-structure Companies to China

Unlike China Concept Stocks that returned subsequent to Baofeng Technology highly valuated in A-share market, Dangdang.com and Huanju.cn announced their privatization coinciding with unprecedentedly rapid and continuous price declines in A shares. Affected by the slumps, many Chi Next-listed companies were devaluated to the original level, and US-listed China Concept Stocks also suffered from price falls. Currently, the declining A shares and fluctuated window period confused China Concept Stocks that prepared for a collective regression. To split or not to split, that’s a question.

In the long run, although China's capital market has been making improvements and fluctuated, VIE companies can still get a huge value from A-share market. In addition to the reason that VIE-structure companies chose to return to the domestic capital market for a high valuation, they can have a better development on the domestic capital market, because their main businesses and users are in China. In addition, this round of slumps in A shares may be an opportunity for China Concept Stocks to reduce costs and speed up the privatization to some extent. Meanwhile, non-listed VIE-structure companies can choose to first go public on New Third Board. For example, Baike.com and Baixing.com recently announced to spin off VIE structure and planned to officially go public on New Third Board in the

6

second half of this year. Indeed, the low-threshold low-cost and short-process New Third Board is a good way for VIE-structure companies to return to A-share market. Therefore, VIE-structure companies still tended to return to A-share market, although it is in an adjustment period.

BPEA News Investment summit in Jiangxi Strategic Emerging Industries successfully held On August 6, 2015, one of the PE into high technology zone activities------ Investment summit in Jiangxi Strategic Emerging Industries was held in Nanchang city, Jiangxi province. This summit was hosted by commission of Industry and Information Technology of Jiangxi Province, supported by China Securities Regulatory Commission in Jiangxi Province, CAPE and BPEA. More than 500 guests joined in this activity.

>Read more 2015 2nd global financial media training seminar successfully held On August 12, 2015, 2015 2nd global financial media training seminar, co-organized by CAPE, Beijing Financial Development Centre, BPEA and Qingkong financial group, was successfully held in Tsinghua Science Park in Beijing. More than 30 Guests from Xinhua News Agency, Thomson Reuters, China Daily and so on attend this activity.

7

This event aims to introduce the operation of investment institutions, incubators, universities from different angles, so that the financial media can better understand public business innovation.

>Read more

8

Korea Trade-investment Promotion Agency visited CAPE

On August 5, 2015, Mr. Zheng Guangyong, Korea Trade-investment Promotion Agency’s (KOTRA) chief representative of China, and his party visited CAPE. Secretary-General of CAPE, Mr. Li Weiqun welcomed them. The two parties exchange their ideas about the investment and trade opportunities between China and Korea. >Read more BPEA visited Kazakhstan Embassy On August 3, 2015, director of the Secretariat of BPEA, Mr. Li Jianqiu, and dean of Hejun business school, Mr. Jiao Shougang visited Kazakhstan Embassy. Counselor Mr. Hua welcomed them. The meeting will open cooperation opportunities between BPEA and Kazakhstan, the association will expand to a broader membership of channels in overseas mergers and acquisitions in the future. >Read more

9

The index of development of Beijing Private Equity industry in the first half of 2015 released On August 12, 2015, under the guidance of Beijing Municipal Finance Bureau, Beijing Financial Development Centre, China Association of Private Equity (CAPE) and Beijing Private Equity Association (BPEA) jointly issued the index of development of Beijing Private Equity industry in the first half of 2015 (2015 H1 Beijing PE index). 2015 H1 Beijing PE index is 118.52, in which the fund raising index is 107.15, the investment index is 106.41, the exit index is 124.82, the confidence index is 139.29.

>Read more The 47th BPEA Monthly Training Program Successfully Hosted

With the support of CAPE, BPEA and King & Wood Mallesons, ‘ the 47th Monthly Training Program—practical operation and legal issues of the return of red chips’took place in Beijing on August 11, 2015. More than 50 investment professionals participated in the training course. Read more

10

Two-way cross-border RMB investment funds and buyout funds industry seminar successfully held On August 12, 2015, Two-way cross-border RMB investment funds and buyout funds industry seminar was successfully held in Grand Millennium Hotel in Beijing. This seminar was co-organized by BPEA and investment bank department of Ping An Bank. More than 50 guests attend this activity.

Read more No. 25th of “SmartMatch roadshow ’ successfully held in BPEA

With the support of CAPE and YAFO Capital, No. 25th of SmartMatch roadshow successfully took place in Beijing on August 6, 2015. In this activity, Israel Phree smart writing pen project was introduced to more than 10 investment professionals. Read more

11

No. 26th of “SmartMatch roadshow ’ successfully held in BPEA

With the support of CAPE and BPEA, No. 26th of SmartMatch roadshow successfully took place in Beijing on August 13, 2015. In this activity, an O2O project focused on auto industry was introduced to more than 10 investment professionals. Read more No. 27th of “SmartMatch roadshow ’ successfully held in BPEA With the support of BPEA, No. 27th of SmartMatch roadshow successfully took place in Beijing on August 20, 2015. In this activity, two projects from Tangshan city which respectively focused on leisure food and machine manufacturing were introduced to investment professionals who attend this meeting.. Read more

BPEA Upcoming Events