taylorwright.ppt

November 1, 2001

Flux in Capital Markets

Hong Kong Venture Capital Association

L:\ecms\Baz\Taylor Wright\Hong Kong\MS VC Final.ppt\05 NOV 2001\1:35 AM\1


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


Section 1

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




(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




Foreign Investment


• 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




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




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




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




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





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





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





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


Section 2

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




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




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


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



Asia Pacific By Issue Type


• 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




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%


17





Telecom3% Tech

13%

FIG4%

Retail14%

Energy7%

Resources14%

Other44%

1990 to 1997US$ 121 Bn

Telecom34%

Tech18%

FIG19%

Retail2%

Energy8%

Resources3%

Other15%


Asia Pacific By Sector

• TMT: 16% to 54%• Now what?

18



Section 3

“Recent” Events




“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



US Tech Follow-ons



Median File to Offer (1.7%) (12.3%)

Median Offer + 2 Weeks 1.7% 2.6%

RoW Tech Follow-ons



US Tech CBs



RoW Tech CBs



20



“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



“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



“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



“Recent” Events

Investor Response

• Portfolio concentration

• Relative value vs. growth

• Liquidity

• Downside protection

• Relative performance

24


Section 4

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




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




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




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




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


Economy & Finance

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