Conducting Effective Due Diligence in Asia: A Practical Guide

1. Conducting Effective Due Diligence in Asia: A Practical Guide FTI Consulting Date: 10 October 2014

2. Setting the Scene

3. Country Risks

4. Country Risks Corruption Perceptions Index 2013 www.transparency.org

5. Fraud in Asia Where does the most significant fraud occur in Asia ? A. Thailand B. China C. Malaysia D. Indonesia E. Japan

6. Fraud: Commonly Seen Issues • Making fictitious buyout offers • Under-reporting bank loan balances • Creating non-existent or fictitious shell companies as customers with no verifiable revenue • Creating fictitious shell companies as suppliers with no verifiable revenue • Indulges in insider trading that is never disclosed • Indulges in pump and dump schemes • Stealing company's assets by transferring it to insiders leaving the shareholders with empty shell company owning no asset • Forging employee numbers

7. Fraud: Commonly Seen Issues • Uses the companies cash to secure the debt of companies privately owned by insiders • Extensive use of offshore entities to avoid tax • Other business fraud: local joint venture partners or key management of the firm establishing competing business • Posting fake cash and fake revenue in their financial statements • Collaborating with local bank officials in China to inflate profit margins and dupe shareholders, underwriters and auditors • Selling to related parties • Inflated asset values • Hiding receivables • Illegally obtained VAT rebates, government grants and low tax rates • Shift in business model away from core business

8. Red Flags for Emerging-Market Companies • Weaknesses in corporate governance: short track record of operations and listing history, murky shareholders’ background, or large and frequent related-party transactions. • Riskier or more opaque business model: unusually high margins compared to peers, concentration of customers, or complicated business structures. • Fast-growing business strategies: very rapid expansion, big capital investments resulting in large negative free cash flow and intangible assets. • Poorer quality of earnings or cash flow:discrepancy between cash flows and accounting profits, disjointed relationship between growth in assets and revenues, large swings in working capital, or insufficient tax paid compared to reported profits. • Concerns over auditors and quality of financial statements: a switch in auditing firm or legal jurisdiction of auditor’s office, delay in reporting, or adverse comment from auditors.

9. The Victims How can we help？

10. How to Mitigate Risk?

11. Investigative Due Diligence Overview

12. Investigative Due Diligence Services Discreetly investigating the background, reputations and track records of individuals and corporate entities is a core part of our business intelligence services. Our services include: • Pre-investment due diligence engagements for global investment banks, private equity and venture capital firms and for hedge funds • Pre-transaction (investment and joint-venture) due diligence engagements for multinational corporations • A significant number of pre-IPO due diligence engagements for issue • Post-investment monitoring • Business intelligence for funds or other investment houses Our Investigative Due Diligence approach adopts a three-phased approach

13. Approach Phase 1 Investigative Research and Public Record Retrieval Using information/identifiers provided, our analysts undertake comprehensive research into the public profile of the subjects. This investigative research may provide pertinent lines of inquiry for our subsequent investigation, and typically includes: • English and local language press reports and trade journals • Business database sources, to include trade and industry sources and the Internet • International sanctions lists • A manual search of records held by relevant bodies for available corporate filings on the subject company/s and business interest searches for the subject individual/s, which often also provide investigative leads • Litigation and bankruptcy records (as available, depending on jurisdiction)

14. Approach Phase 2 Discreet Inquiries Using leads developed our investigative research efforts and our local knowledge and contacts, we then undertake a broad range of very discreet inquiries with government, regulatory, industry and other sources we assess to be in possession of relevant information and to be knowledgeable about the subjects. Specific issues generally covered in relation to the company and/or individuals include: • Background, to include genesis and development of a company and professional track record of an individual • Overview of business activities, to include previous partnerships, actual operations (including through a site visit as appropriate), related entities / subsidiaries, and other interests • Reputation in the industry with business associates • Identification of any connections with government officials or agencies including corruption / bribery related issues • Operational status

15. Approach Phase 3 Analysis and Reporting  We collate and then critically analyse the information available from all sources to prepare a detailed written report on our findings. This will include an executive summary for ease of reference, together with any appropriate recommendations. As relevant, FTI will also provide a link analysis chart.

16. Case Studies

17. Case Study 1: “Pigs in Blankets” Confidential – Not For Further Dissemination

18. Case Study 1 – Pigs in Blankets • FTI Consulting conducted (1) comprehensive investigative research and discreet inquiries to assess the operations and reputation of the company. Following this FTI Consulting conducted (2) public record checks to confirm operational locations and then (3) made discreet site visits to major facilities to monitor a number of activity metrics to confirm actual operations. We also (4) monitored activities of a competitor company to compare its operations with the target company. • Background and Scope of Work • FTI Consulting was engaged by a financial institution to conduct a discreet business intelligence investigation into a Chinese food manufacturer, reverse listed in the US, amid market rumours the company was operating under capacity and fraudulently obtaining government subsidies. • Confidential – Not For Further Dissemination

19. Case Study 1 – Pigs in Blankets Discreet Site Visits – Truck Deliveries • Confidential – Not For Further Dissemination

20. Case Study 1 – Pigs in Blankets Discreet Site Visits – Facilities • Confidential – Not For Further Dissemination

21. Case Study 1 – Pigs in Blankets Key Findings • Our investigation revealed that the company had expanded rapidly in recent years by purchasing assets below fair market value from cash-strapped local governments. In turn the company was able to secure extensive government subsidies for further acquisitions. • Despite developing substantial capacity, site visits revealed that much of the land acquired remains idle while other facilities were being constructed only very slowly. Utilization at the company appeared to be under 50%, with ongoing reputational issues over product contamination and obtaining subsidies under false pretenses further affecting the company’s risk profile. • Confidential – Not For Further Dissemination

22. Case Study 2: The “Donut” Case • Confidential – Not For Further Dissemination

23. Case Study 2 – The “Donut” Case Background and Scope of Work • FTI was engaged by a Japanese company seeking to diversify into bio-fuel production. It had identified a potential JV partner with concessions to plant palm tree plantations in Indonesia. • We were initially asked to undertake an environmental and social impact assessment relating to a processing plant to be built near the plantation. • FTI was also requested to look into the potential JV partner. • Confidential – Not For Further Dissemination

24. Case Study 2 – The “Donut” Case Key Findings • Our assessments found no issues with the proposed facility, which was welcomed by locals for economic reasons. • The potential JV partner was found to be reputable. • During the course of our investigation we heard intelligence from local sources that money supplied by the JV partner to plantation managers to fund planting, was being misappropriated. Discreet inquiries suggested this was occurring on a major scale. • Confidential – Not For Further Dissemination

25. Case Study 2 – The “Donut” Case The Outcome • We recommended aerial photography, which revealed a “doughnut effect” – heavy planting only at the plantation’s perimeter with the centre left uncultivated. • Inquiries revealed that only 30% of the presumed existing trees had in fact been planted. There was also illegal logging activity. • Given the siphoning off of foreign funds for this project, our Japanese client decided not to invest in the JV. • Confidential – Not For Further Dissemination

26. Case Study 2 – The “Donut” Case Aerial Photography of the Plantation • Confidential – Not For Further Dissemination

27. Case Study 2 – The “Donut” Case Aerial Photography of the Plantation • Confidential – Not For Further Dissemination

28. Case Study 3: Project Prickly Heat • Confidential – Not For Further Dissemination

29. Case 3: Project Prickly Heat − Background • Company is listed through Reverse IPO in the OTC market in US and later shifted to Nasdaq. • A short-seller report was issued to show 10 allegations against the Company. Management responded which was further attacked by a report from another short seller to indicate a series of videos showing no operations in the Company’s biodiesel operations in the PRC. • Confidential – Not For Further Dissemination

30. Case 3: Project Prickly Heat −Our Role • SAIC Filings vs. SEC Filings • Chinese Tax Exemption issues • Gas station operations • Acquisitions – related parties? • Review of Wholesale segment operations • Review of operations • Confirmation of cash holdings TO SUPPORT THE COMPANY REFUTE THE ALLEGATIONS 30 • Confidential – Not For Further Dissemination

31. Case 3: Project Prickly Heat −Discreet Inquiries Production Base 31 • Confidential – Not For Further Dissemination

32. Case 3: Project Prickly Heat −Discreet Inquiries Production Base 32 Confidential – Not For Further Dissemination

33. Case 3: Project Prickly Heat −Discreet Inquiries 33 • Confidential – Not For Further Dissemination

34. Case 3: Project Prickly Heat −Discreet Inquiries Gas Station 1 34 • Confidential – Not For Further Dissemination

35. Case 3: Project Prickly Heat −Discreet Inquiries Gas Station 1 35 • Confidential – Not For Further Dissemination

36. Case 3: Project Prickly Heat −Discreet Inquiries Gas Station 1 36 • Confidential – Not For Further Dissemination

37. Case 3: Project Prickly Heat −Discreet Inquiries Gas Station 1 37 • Confidential – Not For Further Dissemination

38. Case 3: Project Prickly Heat −Discreet Inquiries Gas Station 1 38 • Confidential – Not For Further Dissemination

39. Case 3: Project Prickly Heat −Discreet Inquiries Gas Station 3 39 • Confidential – Not For Further Dissemination

40. Case 3: Project Prickly Heat −Discreet Inquiries Gas Station 4 40 • Confidential – Not For Further Dissemination

41. Case Study 4: Japan Confidential – Not For Further Dissemination

42. Case Study 4: Japan Background A property developer had purchased a hotel in Atami which was being operated by a separate company which they suspected had connections to organized crime, and requested an investigation into the background, reputation and integrity of the company and its representatives. Our client wished to demolish the hotel and sell the land. Key Findings • The company was reported to have been established by an individual well known to the Yamaguchi-gumi who was acting as a ‘special advisor.’ • The representative was perceived to have a long career in real estate and hotel management. Although not a registered member of an organized crime group, he held direct links specifically with a group known for being a recruitment center for one of the local organized crime groups as well as the Yamaguchi-gumi. • Members of the Yakuza were reported to utilize the hotel for meetings, functions and holidays. • A ramen shop within the hotel was also owned by an organised crime group • Confidential – Not For Further Dissemination

43. Case Study 4: Japan Assessment and Recommendations • An ‘aura of criminal activity’ surrounded the company’s operations and would require careful handling. • The client was advised to prepare a contingency plan to potentially counter negative reaction such as threats of violence and adverse media publicity as they dealt in a legal manner with this issue. • Further recommendations were made to assist in formulating a contingency plan, as well as conducing overt financial review of the company’s accounts, focusing on potentially corrupt transactions. • Confidential – Not For Further Dissemination

44. Case Study 4: Japan • Confidential – Not For Further Dissemination

45. Case Study 5: Myanmar Confidential – Not For Further Dissemination

46. Case Study 5 - Market Entry Intelligence in Myanmar Background F&B Market Entry • Client: APAC-headquartered international beverage company. • We were asked to assist in their selection of a suitable local company to partner with. Four potential candidates. • Our remit included an evaluation of their relative capabilities as it relates to F&B, market penetration, military connections, and distribution network. • We also arranged for a comprehensive market survey, interviewing hundreds of local consumers to review their opinions and preferences on the target companies’ products. Survey assessed consumer familiarity and perceptions of product advertising, accessibility and market ranking. • Confidential – Not For Further Dissemination

47. Case Study 5 - Market Entry Intelligence in Myanmar Our Sources • Bulk of our work were through on-ground inquiries. • Government, official, diplomatic sources: Contact in the National League of Democracy, Official in the Ministry of Industry, Contact in Myanmar Investment Commission, Contact in Myanmar Federation of Chambers and Commerce Industry, contacts in foreign embassies etc. • Military contacts: Senior military contacts in Myanmar’s armed forces, Military personnel based in Yangon, a former Burmese diplomat based in Singapore, Retired ministry of commerce official etc. • Journalist contacts: Burmese journalist working for the Myanmar Times, business reporter based in Thailand focused on Myanmar, Executive Editor of Burma News International, Contact at the Democratic Voice of Burma etc. • Relevant contacts in the local F&B industry: Suppliers, contractors, former employees of the target companies, sources at competitor firms, business associates of the target companies’ principals etc. • Other knowledgeable local sources: Yangon-based business consultant, Burmese national who works as a consultant for the Asia Development Bank, Myanmar based banker, Myanmar-based staff member of a major international NGO etc. • Confidential – Not For Further Dissemination

48. Case Study 5 - Market Entry Intelligence in Myanmar Key Findings • Our substantial final report included a summary table evaluating the four companies’ relative capabilities and a SWOT analysis for each company. • Two of the subjects were immediately discounted: one was reliant on preferential treatment from the military, with limited capabilities in the F&B sector; the other had a history of delayed payments and unreliability with previous partners. • Of the two remaining companies, both were considered highly desirable business partners: one had significant marketing capabilities, and to have a competent, clean chairman; the other came out very well in our market survey work, though we identified some military ties and had made tough bargains with other beverage companies • Confidential – Not For Further Dissemination

49. Case Study 6: Car Production Confidential – Not For Further Dissemination

50. Case Study • FTI was engaged to undertake a series of on-ground fact finding studies into a car manufacturer in China, with a view to establish its production level, market acceptance, the actual identity of its top customers (as per disclosure), and the background of its founder, amongst a series of informational requirements. • Discreet inquiries and site visits established that whilst its cars are accepted in selected PRC cities, actual uptake on the ground is significantly lower compared with its disclosure (1,000 vs 20,000). In fact, much of the cars produced are currently parked inside its factory. Also, its top 2 suppliers are related to the target company, through shareholding or ownership of the majority of assets. Of its top 4 customers, one has just had its business license suspended, and two others are closely associated with the target company through its management. • We also established that the founder has a reputation for exploiting loopholes in certain national policies for his own personal benefit: he was investigated several times by various regulatory authorities for misappropriated state-owned assets, evaded taxes, and committed commercial fraud in the 2000s, though always emerged unscathed as a result of his relationship with certain local officials. We also found that his son has a penchant for gambling, to the extent that he has a history of getting into trouble with debtors, and was even once detained by police in a hotel due to these scuffles.