London-based Robert Pickering, CEO of Cazenove Group took some time on a recent trip to Hong Kong to describe the impact on Asia of the firm's new investment banking JV with JPMorgan. May Tan, CEO of Cazenove Asia and Karman Hsu, Cazenove Asia's head of corporate finance also offered their insights on why keeping the Asian business separate makes sense:
How does your recent deal with JPMorgan impact your Asian business?
Pickering: We announced a deal with JPMorgan in November to pool our investment banking business with their UK investment banking business - and put them into a 50-50 joint venture company. The main thrust of that transaction is about the UK market where we have a great position in equity capital markets and corporate broking. The deal will allow us to grow our M&A and debt business.
Outside the UK, we have a continental European equity business and our Asian business. They will be in the joint venture structure, but will be operated completely independently. We have been in Asia since 1974 and will continue to operate the business independently under the Cazenove name and offer independent advice and first class execution to corporate clients in Asia.
Tan: The Asian business is split into equities and corporate finance. We've been very active in the Hong Kong and China sphere. We most recently completed an IPO of Shineway, a pharmaceutical company. But in addition to that we've done the IPOs of Harbin Brewery and WuMart. We've focused on mid-size IPOs and are picky about the companies we bring to market and are very mindful of the aftermarket performance. The idea is for us to then continue to raise more money for these companies in secondary placements as they expand.
You brought Harbin Brewery to market a couple of years ago. But you were not involved as an advisor in last year's M&A transaction. Why?
Hsu: We were involved in this transaction up until April last year. We introduced SABMiller to the company as a strategic investor. Then in the ensuing hostile M&A we were conflicted out because both Harbin and SAB were our clients. We don't get involved in hostile situations between two clients. We have been a broker for SAB for many years and we brought Harbin to market. So it was really very difficult from our point of view.
Can you talk a little about Shineway and your selection process for choosing this company?
Hsu: We aim to find good companies and we've been working on this transaction for over 15 months. It's a very interesting company. In the pharmaceutical space I prefer Chinese medicine companies to Western medicine. In the latter you have the global players with huge R&D and sooner or later they will come to China. The edge that Chinese companies therefore have is in Chinese medicine, because of the 5000 years of history. It is very popular among people in China and overseas Chinese around the world.
That's the top-down story. From the bottom-up we looked at all the Chinese medicine companies, their facilities, their management and the strategy. In China's pharma sector there is prescription and over-the-counter. Shineway has 80% of its sales on the prescription drug side. Therefore they are not the typical consumer drugs company.
They have a higher barrier to entry and higher technical requirements. We believe it is a sustainable business model. That's why it's like a utility-play, but a high growth one. The industry has grown 21% over the past four years and the Chinese medicine segment is growing even faster than the Western medicine component in China.
Lastly, the management and the 330 employees owned this company. Therefore we liked the incentivization structure that was built in. Overall the results speak for themselves, with massive participation in the IPO from retail and institutional investors. On the first day the stock was up 11%, and it is now the largest pharma stock listed in Hong Kong, with a $450 million market capitalization.
That gives us a sense of the Asian business. But why did Cazenove decide to do the JV with JPMorgan in the UK and integrate those businesses, but not integrate the Asian businesses?
Pickering: We had the choice to let the businesses operate independently or bang them together. The overall transaction was structured so as to avoid the many pitfalls of putting together people-businesses. If we merged the business in Asia we would have run the risk of exactly those problems. Both we and JPMorgan recognized there was value in the Cazenove business here in Asia, and that it could continue to built as a separately managed business. The reason we can do that is that in Asia we and JPMorgan operate in different parts of the market. JPMorgan concentrates on large caps and we focus more on smaller and mid-cap entities. Where there is overlap, there are arrangements in place to work together.
Hsu: A lot of transactions today have joint-leads, so there will always be room for us to cooperate.
And in terms of where you are placing your chips in Asia, you are mostly focusing on the China market?
Tan: Yes, but not exclusively. We have been active in Southeast Asia too - in Singapore and Malaysia.
