November 1, 2001
Flux in Capital Markets
Hong Kong Venture Capital Association
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Hong Kong Venture Capital Association
Table of Contents
Characteristics of the Asian EnvironmentSection 1
The New Issue Market in AsiaSection 2
“Recent” EventsSection 3
Implications for Asia’s EntrepreneursSection 4
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Section 1
Characteristics of the Asian Environment
Hong Kong Venture Capital Association
L:\ecms\Baz\Taylor Wright\Hong Kong\MS VC Final.ppt\05 NOV 2001\1:35 AM\3
Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Highly Complex Investment Environment
• Asia has succeeded in attracting capital
• The environment is very complex
• High relative growth
• Multi-dimensional
• Political maturation ongoing
• Developing capital markets
• Volatility and event risk
• Risk / Return trade-off
Active Management Opportunity
2
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
(4)
(2)
0
2
4
6
8
10
12
14
16
1990 1992 1994 1996 1998 2000 2002E
Australia China HK
India Korea S'pore
Taiw an
Real GDP Growth%
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
1990 1992 1994 1996 1998 2000 2002E
AP US W Eur
Regional GDP as a Proportion of Global GDP%
AP
USA
W Eur
Asia Pacific GDP Growth
Source Morgan Stanley Research
• High relative growth• Relatively small portion of
global GDP
3
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Foreign Investment
Source Morgan Stanley Research
• Historical access to FDI• Little absolute growth since
‘95
25,471
31,823
50,689
62,023
77,021 78,294
86,009
76,014 75,778
84,096
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
91 92 93 94 95 96 97 98 99 '00Chi India Indo Korea Mal Phil Sing Tai
Thai Aust NZ
Asia Pacific FDI US$ MM
4
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Source Morgan Stanley
Asian Sovereign Debt SpreadsSince Asian Crisis
• Asia Pacific international debt markets are stratified
• Limited international financing opportunities for corporates
0
500
1000
1500
2000
2500
12/22/1997 5/6/1998 9/17/1998 2/5/1999 6/18/1999 10/29/1999 3/16/2000 7/27/2000 12/7/2000 4/23/2001 8/31/2001
Indonesia Korea Phillipines China Thailand
Debt SpreadsSpreads to UST (Basis Points)
Indonesia (B3/CCC+) 7.750% '06Korea (Baa3/BBB-) 8.875% '08Philippines (Ba1/BB+) 8.875% '08China (A3/BBB+) 7.300% '08Thailand (Ba1/BBB-) 7.750% '07
5
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Source Factset
0
100
200
300
400
500
600
700
1995 1996 1997 1998 1999 2000 2001
World AP Europe S&P 500 Nasdaq
Rebased to 100
Stock Market Price Performance
• Asia Pacific stock markets have attracted international capital, yet broad regional performance has lagged the rest of the world
6
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Sources Bloomberg, Morgan Stanley Research
Market Cap Creation
• AP market cap growth of 14% since 1996 vs 75% and 87% for the US and Europe, respectively
2,611.40
6,764
4,887
706.191,036 806
5,648.43
13,539
9,887
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1-Jan-96 31-Mar-00 Today
MSCI Europe MSCI Asia S&P 500
Equity Market Cap US$ Bn
7
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Source Factset
0%
10%
20%
30%
40%
50%
60%
70%
1990 1991 1992 1993 1994 1995 1996 1998 1999 2000
World AP Europe S&P 500 Nasdaq
Index 100 Day Volatility1990 to Date
VolatilityBroad Indices
• Historically, Asia Pacific volatility has been high
• Masked by Nasdaq’s boom and bust and the bursting of the TMT bubble
8
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Source Morgan Stanley Research
0%
5%
10%
15%
20%
25%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Asia ROE Europe ROE US ROE
RoE by Region
Shareholder ValueReturn on Equity
• Overall, Asia Pacific RoEs have lagged in the 1990s
• The Asian financial crisis exacerbated this trend
Asian RoE
9
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Source Morgan Stanley Research
0x
1x
2x
3x
4x
5x
6x
7x
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Asia PBV Europe PBV US PBV
Price to Book by Region
Asian PBV
Shareholder ValuePrice to Book
• Multiples are therefore relatively compressed
10
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Hong Kong Venture Capital Association
Characteristics of the Asian Environment
Source Morgan Stanley Research
Importance of Shareholder ValueMSCI Equity Market Returns and Risks 1/96 to 12/00
• Active managers must look through the noise
• Stock selection is key in the long term
Risk/Return AnalysisAnnual Return
India
Thailand
MalaysiaJapan
Korea
Taiw an
Singapore
Europe
Asia Ex Japan
Hong KongAustralia
MSCI China
USA
(30%)
(20%)
(10%)
0%
10%
20%
30%
10% 20% 30% 40%
High Risk, Low Return
Low Risk, High Return
Standard Deviation
11
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Section 2
The New Issue Market in Asia
Hong Kong Venture Capital Association
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Hong Kong Venture Capital Association
The New Issue Market in Asia
Key Themes in Asia
• Primary markets potential sources of huge amounts of capital
• Global linkage
• Prominence of Greater China
• Crowding out
13
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Hong Kong Venture Capital Association
The New Issue Market in Asia
Primary Equity & Equity Linked Markets
• Primary markets in Asia boomed with other global markets
• Quick recovery from financial crisis
• Relatively lumpy• 2001 suggests a very
different trajectory
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Global Equity & Equity-Linked Volume ($ MM) 1990 to Date
CAGR'90 -'00 28.1%'90 -'01 19.3%
0
10,000
20,000
30,000
40,000
50,000
60,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
AP Equity & Equity-Linked Volume ($ MM) 1990 to Date
CAGR'90 -'00 32.8%'90 -'01 18.0%
14
Sources SDC, Bondware Sources SDC, Bondware
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Hong Kong Venture Capital Association
The New Issue Market in Asia
Sources Bloomberg, SDC, Bondware
Asia Pacific By Country
• US$ 193 Bn raised vs US$ -92 Bn market cap created
• International players active
43
109.2
43.4
3.8
87.5
(62.4)
19.5
(43.6)
2.2
(34.9)
15.7
(66.1)
18.7
1.96.3
-100
-50
0
50
100
150
Mkt Cap Creation Issuance Vol
Value Creation 1/96 to Date vs New Issue VolumeUS$ Bn
Australia HK Korea M’sia S’pore Taiwan Thailand
15
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Corporate IPOs13%
Privatization IPOs18%
Privatization FO20%
Corporate FO17%
CB/EB17%
Blocks16%
1998 to DateUS$ 116 Bn
Corporate IPOs20%
Privatization IPOs25%
Privatization FO8%
Corporate FO19%
CB/EB20%
Blocks8%
1990 to 1997US$ 121 Bn
Hong Kong Venture Capital Association
The New Issue Market in Asia
Asia Pacific By Issue Type
Sources SDC, Bondware Sources SDC, Bondware
• IPOs: 45% to 31%• Larger deal sizes
# Med. SizeUS$
Corp IPOs: 129 127 MMPriv. IPOs: 79 200 MMPriv. FOs: 27 187 MMCorp FOS: 146 100 MMCB/EB: 163 100 MMBlocks: 48 162 MM
# Med. SizeUS$
Corp IPOs: 72 116 MMPriv. IPOs: 21 299 MMPriv. FOs: 15 345 MMCorp FOs: 114 160 MMCB/EB: 65 150 MMBlocks: 99 103 MM
16
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Hong Kong Venture Capital Association
The New Issue Market in Asia
Asia Pacific By Geography
• Greater China: 37% to 50%• Marginalisation of lesser
weighted countries
Hong Kong15%
China14%
Taiw an8%
Australia19%
Korea (South)8%
Singapore8%
Thailand7%
India5%
Other16%
1990 to 1997US$ 121 Bn
Hong Kong21%
China21%
Taiw an10%
Australia19%
Korea (South)12%
Singapore9%
India2%
Other6%
1998 to DateUS$ 116 Bn
17
Sources SDC, Bondware Sources SDC, Bondware
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Hong Kong Venture Capital Association
The New Issue Market in Asia
Telecom3% Tech
13%
FIG4%
Retail14%
Energy7%
Resources14%
Other44%
1990 to 1997US$ 121 Bn
Telecom34%
Tech18%
FIG19%
Retail2%
Energy8%
Resources3%
Other15%
1998 to DateUS$ 116 Bn
Asia Pacific By Sector
• TMT: 16% to 54%• Now what?
18
Sources SDC, Bondware Sources SDC, Bondware
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Section 3
“Recent” Events
Hong Kong Venture Capital Association
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Hong Kong Venture Capital Association
“Recent” Events
The Decline of Tech Issuance
• Nasdaq sold off 16% in April 2000
• Nasdaq and MSH (63%) and (58%) respectively since March 31, 2000
• Requires a new approach to TMT investing
1/99 to 3/00 4/00 to Date
US Tech IPOs
Volume US$ 28.7 Bn US$ 19.7 Bn
Number of Deals 300 121
Median File to Offer 27.3% 0.00%
Median Offer + 2 Weeks 77.3% 18.3%
RoW Tech IPOs
Volume US$ 34.1 Bn US$ 24.7 Bn
Number of Deals 155 121
US Tech Follow-ons
Volume US$ 63.0 Bn US$ 23.0 Bn
Number of Deals 213 102
Median File to Offer (1.7%) (12.3%)
Median Offer + 2 Weeks 1.7% 2.6%
RoW Tech Follow-ons
Volume US$ 26.2 Bn US$ 33.7 Bn
Number of Deals 99 89
US Tech CBs
Volume US$ 22.2 Bn US$ 35.2 Bn
Number of Deals 66 81
RoW Tech CBs
Volume US$ 5.7 Bn US$ 9.1 Bn
Number of Deals 22 27
20
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Hong Kong Venture Capital Association
“Recent” Events
Impact of Sep 11Volatility Analysis
• Sep. 11 was a significant shock
• Markets have tended to digest shock quickly
• Event risk is high
Source Factset
0
20
40
60
80
100
120
140
160
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
VIX Index1987 to Date
1987US Stock Market Crash
2001Sept 11 Attacks
1998Russian Crisis
1997Asian Crisis
2000Nasdaq Peak
21
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Hong Kong Venture Capital Association
“Recent” Events
Source Bloomberg
Comparative Sector Performance in S&P 500Since 9/11/2001
9/11/2001 to Date%
Lowest Level Since Sept 11% % Change from Low
Electronics Defense 38.7 0.0 38.7
Telecom Equipment 7.9 (9.3) 17.2
Retail 7.5 (13.0) 20.5
Insurance 3.3 (12.7) 16.0
Healthcare 3.0 (7.6) 10.6
Tech (1.2) (21.7) 20.5
S&P 500 (1.7) (13.3) 11.6
Telecom Services (2.0) (2.0) 0.0
Consumer Staples (2.9) (7.8) 4.9
Materials (4.1) (15.6) 11.5
Oil & Gas (4.5) (15.9) 11.4
Energy (4.8) (16.8) 12.1
Utilities (4.8) (15.0) 10.3
Industrials (5.4) (20.8) 15.5
Hotels & Leisure (8.3) (19.8) 11.6
Media (9.1) (17.8) 8.8
Banking (9.2) (9.5) 0.3
Airlines (24.3) (35.9) 11.6
Impact of Sep. 11 (cont’d)Sector Performance
• S&P (1.4%) since Sep 11• Most S&P sectors are down• Most have rebounded from
their lows by more than 10%
22
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Hong Kong Venture Capital Association
“Recent” Events
Source SDC
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
14-Sep 21-Sep 28-Sep 5-Oct 12-Oct 19-Oct 26-Oct
IPO FO Block CB
Global Equity & Equity Linked Volume by WeekUS$ MM
Impact of Sep 11 (cont’d)New Issue Volume
• New issue volumes recovering
• Highest volumes in most defensive security / offering structures
23
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Hong Kong Venture Capital Association
“Recent” Events
Investor Response
• Portfolio concentration
• Relative value vs. growth
• Liquidity
• Downside protection
• Relative performance
24
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Section 4
Implications for Asia’s Entrepreneurs
Hong Kong Venture Capital Association
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Hong Kong Venture Capital Association
Implications for Asia’s Entrepreneurs
Asia Pacific Going Forward
Moving Trends
Foreign Direct Investments Capital Markets
Stakeholders Shareholders
Local Practice Global Practice
State Owned Enterprises Privatizations
Asian Tigers Greater China
26
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Hong Kong Venture Capital Association
Implications for Asia’s Entrepreneurs
Asia Pacific Backlog
Sources SDC, Morgan Stanley Source Morgan Stanley
Source Morgan Stanley
• TMT 47% of AP pipeline• Greater China 54%
56
20
49
56
69
0
10
20
30
40
50
60
70
80
2000 2001
Completed Backlog
AP Equity & Equity Linked Issuance US$ Bn
FIG21%
Telecom37%
Tech10%
Energy10%
Transport12%
Other10%
Asia Pacific BacklogBy Sector
Australia13%
China31%
Hong Kong12%
Taiwan12%
India6%
Korea5%
Singapore13%
Other8%
Asia Pacific BacklogBy Country
27
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Hong Kong Venture Capital Association
Implications for Asia’s Entrepreneurs
Operational • Simple, achievable business model
• Visible, quantifiable growth
• Defensible competitive advantage
Financial • Cash flow / earnings visibility
• Self funding / FCF positive
• RoE
• Leverage
Governance • Management / sponsorship quality
• Disclosure / transparency
Valuation • DCF
• Cash flow multiples
• Earnings multiples
• Growth-adjusted multiples
Technical • Market Cap
• Free float
• Listing / Domicile
• Indexation
Investor Priorities
28
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Hong Kong Venture Capital Association
Implications for Asia’s Entrepreneurs
Near-Term International New Issue Implications
• Deals in global sectors have highest probability of success
• Privatization’s will receive a high level of attention
• As will deals for large-cap liquid issuers
• The rest will need to shout for attention - differentiation key
• Issuers in countries with marginal MSCI weighting will face significant challenges
29
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Hong Kong Venture Capital Association
Implications for Asia’s Entrepreneurs
IPO Candidates
Opportunities
•Consolidate / take market share from weaker players to increase scale
•Look cross border for growth•Further refine business model•Build track record of execution•Get ready for the window to open
Risks
•Limited capital access•Political and regulatory change / intervention
•Country of domicile
30
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