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Inside Caltech

Inside Caltech. Example of Private Placement Activity in China Industrial Relations Center December 5, 2007 Tom Korzenecki, Principal Managing Director Grand Avenue Capital-Asia Member FINRA (NASD). Inside Caltech. Typical Factors found in Chinese Companies

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Inside Caltech

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  1. Inside Caltech Example of Private Placement Activity in China Industrial Relations Center December 5, 2007 Tom Korzenecki, Principal Managing Director Grand Avenue Capital-Asia Member FINRA (NASD)

  2. Inside Caltech Typical Factors found in Chinese Companies • Complex ownership relationships involving private parties and individuals, state ownership and public entities • For the most part, exports from China meet or exceed Quality, Product Performance, and Technical requirements, typically at lower cost • Banking relations are looser relative to Western practices….credit, number of lenders to individual companies, high leverage…… fast growing companies need equity to ultimately go IPO offshore • Tax advantages and 5-year tax holidays for “high tech” industries and those catering to exports: 0% - 15% -15% -30% -30%......new subsidiaries will start 0% tax rate again • Labor rates are low: $0.65/hr straight time typical….straight time + overtime ~ 300 hours per month……$0.87/hr blended rate….Shanghai (western areas less) • Management typically has strong work ethic, driven, entrepreneurial and much wealth being created • laws and regulations favor controlled capitalism but are in flux, changing gradually • Growth rates and CAPEX seem to defy Western paradigms….the idea that capital intensive businesses can be perpetually over capacity hasn’t sunk in

  3. Typical ownership: state, individuals inside/outside PRC, public companies…..often all together

  4. Inside Caltech Elements of China-based private placements • Private Equity groups seeking 30+% IRR…holding periods less than in West • How to exit remains primary consideration…..IPO offshore preferred, but IPO inside PRC not unattractive now…..69x average PE Shanghai exchange. • control investments are less likely desired by investee…..substantial minority investments are the norm…..very unlike PEG in West • politically sensitive “national treasure” industries or companies are harder to invest in (Carlyle in PRC equivalent of CAT, banks, media, etc.) • PRC trying to accomplish in 15 years what we have accomplished in 100 years…..the Chery is coming to the US in 2009!

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