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Structured Financial Solutions

The Emerging China Strategies Fund

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A USD 1.00 billion Fund, Co-Sponsored by:
China Water Investment Co. Ltd. and MaxEn Asia Holdings Limited

Executive Summary

The past decades have produced exceptional economic growth in the People’s Republic of China. Much of this growth has been driven by the fact that Central Government sets clear policies (with explicit targets) across industries of national importance. This “policy led capitalism” provides direction, impetus, and enabling mechanisms by which private sector enterprises can flourish across identified industries – oftentimes by working in cooperation with regional and provincial government bodies.

In China policy is re-set in “Five-Year Plans” – the most recent being the 12th Five-Year Plan of 2011 through 2015.

Against this background, many of China’s State-Owned Enterprises (“SOEs”) have both prospered and have re-invented themselves, to the point where today, many SOEs act as commercially-minded and commercially-operated companies. The combination of historical relationships, government ownership, access to Chinese capital, credit, technologies and science, has provided such entities with a competitive advantage when compared to foreign entrants wishing to ‘go it alone’ in China.

China’s current 12th Five-Year Plan is the most ambitious yet. Key requirements are:

  • Economic: GDP to grow by 7% annually on average, more than 45 million jobs to be created in urban areas, urban registered unemployment to be kept no higher than 5 percent and prices to be kept generally stable ;
  • Water: Water consumption per unit of value-added industrial output to be reduced by 30% and water efficiency coefficient in agricultural irrigation to increase to 0.53;
  • Food security & agriculture: Annual grain production capacity to be no less than 540 million tones and farmland reserves to be no less than 1.818 billion mu;
  • Energy efficiency, clean energy & new energy: Energy initiatives are three out of the seven priority industries in the 12th 5-Year Plan. Non-fossil fuel to account for 11.4% of primary energy consumption, energy consumption per unit of GDP to be cut by 16% and CO2 emission per unit of GDP to be cut by 17%. China Academy of Science expects up to 100,000 MW of integrated gas, combined cycle (“IGCC”) power production by 2020;
  • Innovation: Expenditure on R&D to account for 2.2% of GDP; and
  • Environment: Forest coverage rate to rise to 21.66 % and forest stock to increase by 600 million cubic meters.

China has been, is, and will continue to be a coal-powered economy. In 2009 according to IEA, coal represents about 67% of the total China’s primary energy supply, or 2.3 billion ton of oil equivalent (toe).

China plans to invest RMB 11.1 trillion in the power industry in the next 10 years, with RMB 5.3 trillion invested in 2011 to 2015. RMB 2.75 trillion will be invested in power plant construction and RMB 2.55 trillion will be invested in grid construction.1 By 2015 coal demand will be 3.8 billion toe1, and China’s thermal coal imports could rise to 200 million toe in 2015.2

China plans to invest an average of RMB 400 billion per year (from 2011-2020) in water projects.3

Focus on modernizing China’s agricultural industry remains strong in the 12th Five-Year Plan, which emphasizes agriculture modernization, agricultural technology development and equipment and infrastructure upgrades. China’s central government is expected to invest about RMB 6 trillion (US$900 billion) between 2011 and 2015.4 Key focal points for the agricultural industry’s development include: food security; increased output; modernization; land management; and enhanced agricultural technologies

These are precisely the sectors of focus for the ECS Fund: which will invest in accordance with Government-led policies across the above “Sectors”. However, the ECS Fund will not be a passive investor but an active developer and co-owner of contractually structured, but growth- driven businesses – by assuming a principal-finance strategic partner business model.

The Fund Co-Sponsors

The Fund is co-sponsored by China Water Investment Co. Ltd (“HHO”), and MaxEn Capital Advisors, Limited (“MaxEn”): collectively the “Co-Sponsors”. HHO is one of China’s most impressive commercially-driven State Owned Enterprises “SOEs.” HHO is committing RMB 126 million (US$20 million) to anchor an onshore (China) investment mechanism and will act as domestic Co-Sponsor of the ECS Fund. The onshore entity will co-invest capital on a pari passu basis with international investors.

1KPMG – China 12th 5-plan – Energy

2http://www.reuters.com/article/2011/05/30/us-coal-asia-idUSTRE74T2Q220110530

3http://www.chinastakes.com/2011/1/chinas-investment-momentumrmb-4-trillion-for-water-projects.html

4http://www.jljgroup.com/uploads/JLJ_Newsletter/October2011/ChinaFocus_October2011.html

HHO

HHO is a state-owned enterprise that specializes in water investment and management. It was founded by the Bureau of Comprehensive Development of the Ministry of Water Resources, Sinohydro Corporation and other strategic investors in 2005. While HHO’s core competence is water supply and regional water diversion, it invests in integrated water industrial chain that includes municipal water supply and drainage, seawater desalination, wastewater treatment, sludge treatment, municipal solid waste treatment & power generation, and watershed restoration as well. HHO is a “hands on developer and industry operator” of the types of businesses it invests in, and manages for growth.

The company is adopting a different strategy to expand the scope of business and roll out other types of projects in the domestic water and energy sectors – using combined competitive advantages provided by its shareholders plus Chinese capital markets and lenders. After six years’ rapid development, HHO has become one of the top three state-owned water enterprises in China.

HHO has 17 subsidiary companies, which are located in Shanghai, Jiangsu, Zhejiang, Shandong, Xinjiang, Inner Mongolia, Sichuan and Northeastern areas, with their services covering more than 50 cities. HHO also controls and shares many listed water-related companies. Now, with more than 7,400 employees, HHO’s daily water treatment capacity in 2011 reached 6.5 million tons per day, revenue of RMB 2.2 billion (US$355 million), a 33% increase compared with 2010; total assets of HHO are over RMB 15 billion (US$2.42 billion), 20% higher than 2010.

The company has been awarded “Top 10 Influential Water Enterprises in China” for 5 consecutive years since its establishment and also entitled “Famous Water Enterprise” in China Water Fair held in 2009, 2010 and 2011. Another award, “National Premium Water Enterprise”, was from Water Conservancy Enterprise Association in 2008 and 2009. “HHO China Water” has become a well-known brand in the Chinese water sector.

MaxEn

MaxEn is one of the companies held by Aeicon Corporation, Ltd, a holding company established in 1995. MaxEn is committing US$ 20 million of capital to anchor the General Partner of the ECS Offshore Fund; it will own and operate the offshore fund management company.

The MaxEn Capital Advisors group comprises experienced professionals with successful track records internationally – including China. Experience includes, project development; technology company building; investment banking, M&A and project finance; privatizations and public- private concessions; private equity and infrastructure funds establishment & management. Collectively, its professionals have raised in excess of US$25 billion of debt and equity finance for development companies and projects across coal and mineral reserves; oil & gas (upstream and mid-stream); power generation (coal, gas, LPG, biomass, wind, and hydro); waste management; infrastructure (offshore oil and gas; transportation; industrial wastewater treatment; refining); and environmental technologies.

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