Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...

 
Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...
Embarking on the journey to a new era
of opening-up
2018 Deloitte Outbound Investment Guide for
Chinese Businesses
Global Chinese Services Group | June 2018
Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Foreword                                                                   1
Part I – Overview                                                          4
    Retrospect and Prospect of Chinese Economy                             4
    Retrospect and Prospect of Chinese Outbound Investment                 5
    Greater China Outbound M&A Review                                      9
    The Belt and Road Initiative to Drive a New Chapter of Globalization   15
    Considerations and Preparations before Chinese Outbound Investment     17
Part II– Go Global with Chinese Companies                                  20
    Challenges and Solutions for Chinese Outbound Investment               20
    Deloitte Provide One-stop Solutions for Chinese Outbound Investment    25
Contact us                                                                 34

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Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Foreword
    Deloitte opened its first China office in Shanghai as early as 1917, becoming one
    of the first foreign accounting organizations to establish a presence in China. Last
    year, Deloitte China celebrated its 100th anniversary. Over the past 100 years,
    Deloitte China is committed to making an impact that matters to clients, people and
    society, and has grown into a leading professional services organization with more
    than 13,000 people in 22 offices across Chinese Mainland, Hong Kong, Macau and
    Mongolia. Deloitte's journey in China is an epitome of China's social and economic
    development. Today, China is the world's second largest economy with a net capital
    outflow. With Chinese investors' footprints expanding all around the globe, the
    number of Chinese companies listed on 2017 Fortune Global 500 surged to 115
    from 11 in year 2000.

    In addition to providing quality services to high-growth domestic market, Deloitte is
    committed to helping Chinese companies penetrate and lead the global markets.
    Based on this concept, Deloitte Global Chinese Services Group (GCSG) was
    established in 2003 to support Chinese companies to expand globally and move
    up the value chain. The guide was jointly compiled by Deloitte China and Deloitte
    Global Chinese Services Group professionals with local expertise. We hope that the
    guide could help Chinese companies engage in and make a greater impact in the
    global market, and become world-class multi-national companies.

                                                                             Patrick Tsang
                                                                         Deloitte China CEO

    Over the past decade, "Going Global" has been the compelling force for China's
    economic transformation and the steering guidance for Chinese enterprises'
    expansion overseas. An increasing number of Chinese enterprises investing
    heavily overseas, establishing globalized industrial chain and value chain.
    Meanwhile diversified challenges set in during the globalization. Now is the
    time to not only go global, but to go well enough and steady enough so as to
    materialize the verily internationalized operations and become the truly world-
    class enterprises with global competencies.

    In pursuit of service excellency during the process of Chinese enterprises
    going global, Deloitte deploys Chinese-speaking professionals across its global
    network to provide professional advisory and assistance anywhere, anytime.
    This Guide earmarks our efforts and sincerity to go global with you, and may
    you find it helpful for your globalization road map!

                                                                         Vivian Jiang
                                                           Deloitte China Deputy CEO
                                      Deloitte China Markets & Global Network Leader

                                                                                              1
Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...
2018 Deloitte Outbound Investment Guide for Chinese Businesses

                        China is making strides in transforming its economy - quality of growth has been
                        the mantra this year. Meanwhile, synchronized recovery in developed countries
                        has shown a positive prospect for global growth. In the New Era, China will play
                        a more active role in updating the international economic and trade order – not
                        only learning from others' strong points but also embracing open innovation in
                        the process of going out. The perspectives on Chinese economy and outbound
                        investment in this guide are based on Deloitte's long-term study on the macro
                        and industry trends, as well as deep communication with clients from all walks
                        of life.

                                                                                                    Sitao Xu
                                                                            Chief Economist at Deloitte China

                        An increasing number of countries and organizations are actively involved in
                        the Belt and Road (B&R) Initiative to promote its deep development across the
                        globe. Now, the Initiative looks beyond the infrastructure projects, expanded
                        to other diverse industries and sectors in destination countries. While Chinese
                        State-owned Enterprises took lead in the Initiative at the early stage, more
                        private and foreign-funded enterprises are taking parts. It is suggested that
                        the B&R Initiative has driven a new chapter of Chinese outbound investments,
                        during which the overseas investment will witness a continuous growth in value
                        and, more importantly, quality and structure improvement. To move up the
                        value chain, Chinese companies shall strengthen their global competitiveness
                        and resources allocation, and enhance risk management control. This guide
                        offered investment overviews of countries and regions alongside the B&R, as
                        well as key concerns of Chinese outbound investments. Hopefully this guide
                        can be of assistance to companies considering entering or expanding their
                        businesses in the overseas markets.

                                                                                                 Norman Sze
                                                                 Deloitte Belt and Road Services China Leader
                                                                  Deloitte Northern Region Managing Partner

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Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...
2018 Deloitte Outbound Investment Guide for Chinese Businesses

As a trusted business advisor, Deloitte is fully committed to understanding and
addressing the business needs and concerns of Chinese outbound investors.
Our professionals possess the hands-on outbound experience, in-depth sector
knowledge as well as on-the-ground understanding of local market practice
advising them throughout the process of the transaction or project. Leveraging
the global network of Deloitte, we are devoted to providing one-stop and high-
quality multidisciplinary services in connection with their outbound investments
regardless of their destination countries from sourcing to execution, from
negotiation to integration.

This guide provides advice and solutions for Chinese outbound investors to
address their complex business challenges, shares Deloitte's distinctive Belt
and Road Initiative services and our dedicated outbound investment team. This
guide is hopefully to assist Chinese companies in identifying right strategies to
guide their over-all investment journey.

                                                                         Derek Lai
                                                        Vice Chair of Deloitte China
                                             Deloitte Global FA Belt & Road Leader

Deloitte deployed dedicated teams of professionals possessing Chinese
speaking capabilities and knowledge about China and Chinese companies to
provide professional advice and comprehensive solutions to Chinese companies
globalization. We are committed to expanding our footprints as our clients
expand theirs. To stay ahead of the curve in putting the needs of clients as
our priority, we continue our efforts in evolving and adapting to the changing
dynamics of the marketplaces, and provides advice and solutions to clients to
address their complex business challenges.

2018 Deloitte Outbound Investment Guide for Chinese Businesses, released
in the joint efforts of Deloitte Global Chinese Services Group and Deloitte
professionals across the globe, aims to provide insights on Chinese economy
and outbound investment overview and outlook, solutions to outbound related
business challenges, and highlights of selected countries as hot destinations.
We hope this guide will be of great help to you and please feel free to contact us
if professional advice on Chinese outbound investments are needed.

                                                                    Rosa Yang
                               Deloitte Global Chinese Services Group Chairman
                               Deloitte Global Network Affairs Managing Partner

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Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Part I – Overview

1.Retrospect and Prospect of                                                                               a comparable performance in 2018.                                                           unsustainable in the medium term.
Chinese Economy                                                                                            Therefore, it makes good sense for                                                          China will be tested when the cyclical
Embracing a lower growth target                                                                            China to embrace a slower GDP                                                               momentum starts losing steam.
The closely-watched 19th Party                                                                             growth target.                                                                              In short, GDP growth shall slow down
Congress has resulted in some clarity                                                                                                                                                                  in 2018. Considering the tightening
on economic policy. As expected,                                                                           Economic growth certainly comes                                                             of labour market, China should lower
certain landmark years (e.g. 2020,                                                                         with costs (e.g. exploding credit                                                           its expectation on GDP growth (to
2035, and 2050) were given additional                                                                      growth). Indeed, the new mantra,                                                            6.0% or even lower). Deleveraging
weight with regard to economic                                                                             coined by President Xi regarding                                                            will become more urgent given the
and social welfare targets. However,                                                                       the ‘mismatch between uneven                                                                Federal Reserve's tightening policies
the GDP growth target has been                                                                             development and people's desire                                                             and the decision made during Trump's
deemphasized. This is a welcome                                                                            for a better life’, suggests that                                                           visit to China, which would limit the
development given that de-leverage                                                                         policymakers had become to realize                                                          domestic credit growth and lead to
and SOE reforms can only proceed                                                                           that economic development was not                                                           further opening of financial industry
against a backdrop of slower growth.                                                                       panacea for everything. We believe                                                          (the foreign investment proportion
Looking at the contributions from                                                                          that China's economic resilience is                                                         in securities companies, fund
the property sector and exports in                                                                         extremely undervalued; however, the                                                         management companies and future
2017, it would be too much to expect                                                                       current growth rate (around 6.5%) is                                                        companies will increase to 51%).

Figure 1 Growth pressure of exports and real estate investment under high base

                               China's exports: YoY                                                                                                                          Investment of property development:
                               OECD composite leading indicator (right)                                                                                                      cumulative YoY
                                                                                                                                                                             Commercial housing sales area: cumulative
 (% )                                                                                                                                                    (%)                 YoY (right)                                (%)
60.00                                                                                                                                         100.60   12.00                                                           40.00

                                                                                                                                              100.40
                                                                                                                                                                                                                                                                                       30.00
40.00
                                                                                                                                              100.20   9.00
                                                                                                                                                                                                                                                                                       20.00
20.00                                                                                                                                         100.00

                                                                                                                                               99.80   6.00                                                                                                                            10.00
    0.00                                                                                                                                       99.60
                                                                                                                                                                                                                                                                                        0.00
                                                                                                                                               99.40   3.00
-20.00
                                                                                                                                                                                                                                                                                       -10.00
                                                                                                                                               99.20

-40.00                                                                                                                                         99.00   0.00                                                                                                                            -20.00
           2015-01
                     2015-04
                                2015-07
                                          2015-10
                                                    2016-01
                                                              2016-04
                                                                        2016-07
                                                                                  2016-10
                                                                                            2017-01
                                                                                                      2017-04
                                                                                                                2017-07
                                                                                                                          2017-10
                                                                                                                                    2018-01

                                                                                                                                                               2015-02
                                                                                                                                                                         2015-05
                                                                                                                                                                                   2015-08
                                                                                                                                                                                             2015-11
                                                                                                                                                                                                       2016-02
                                                                                                                                                                                                                 2016-05
                                                                                                                                                                                                                           2016-08
                                                                                                                                                                                                                                     2016-11
                                                                                                                                                                                                                                               2017-02
                                                                                                                                                                                                                                                         2017-05
                                                                                                                                                                                                                                                                   2017-08
                                                                                                                                                                                                                                                                             2017-11

Source: Wind, Deloitte Research
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2018 Deloitte Outbound Investment Guide for Chinese Businesses

2.Retrospect and Prospect of                   Under the guidance of the B&R
Chinese Outbound Investment                    Initiative, Chinese enterprises are
Despite the global slowdown of capital         accelerating their globalization.
flow, China’s overseas investment              In 2017, MOFCOM and the major
kept a strong growth momentum                  provincial commerce administrative
with the boost of B&R Initiative and           departments recorded and
International Capacity Cooperation.            approved 6,172 overseas investment
According to World Investment Report           enterprises, and staffs deployed
2017 published by UNCTAD, in 2016,             overseas reached 1 million, indicating
global foreign direct investment flow          China’s significantly improved
fell by 8.9% to US$1.45 trillion. In spite     internationalization.
of this, China still stood out as the
second largest investing country in            The Belt and Road Initiative drives
the world. Total investment outflow            a new chapter to deepen all-round
of China increased by 34.7% in 2016            cooperation as well as investment
to US$196.15billion, accounting for            and trade development
13.5% of global outbound investment,           In 2017, total value of non-financial
exceeding 10% for the first time.              direct investment from Chinese
Since ODI outnumbered FDI for the              companies to 59 countries along the
first time in 2015, China has become           Belt and Road reached US$14.36
a net capital exporter in terms of             billion, accounting for 12% of total
two-way direct investment. In 2016,            non-financial direct investment of the
the gap between ODI and FDI further            period, up by 3.5%. Main investment
widened, with net capital outflow              hotspots include Singapore, Malaysia,
achieving US$62.45 billion.                    Indonesia, Pakistan, Vietnam, Russia,
                                               UAE and Cambodia etc. There were

Figure 2 Proportion of China’s ODI flow to global ODI flow grew rapidly

16.0%

14.0%                                                                            13.5%

12.0%
                                                                   9.9%
10.0%                                                9.1%

8.0%                                  7.6%
                        6.7%
6.0%       4.8%
4.0%

2.0%

0.0%
           2011         2012          2013           2014          2015           2016

Source: MOFCOM, "2017 World Investment Report" by UNCTAD, Deloitte Research

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Embarking on the journey to a new era of opening-up - 2018 Deloitte Outbound Investment Guide for Chinese Businesses Global Chinese Services Group ...
2018 Deloitte Outbound Investment Guide for Chinese Businesses

in total 62 M&A transactions along               Outbound investment plummeted              year growth of 8.7%, among which the
the B&R totaling at $8.8billion, with            due to supervision, no new                 number of projects with value over
year-on-year growth of 32.5%. Among              projects in sensitive industries           US$50 million reached 782, adding up
them, the largest deal is China                  In 2017, irrational outbound               to US$197.74 billion, taking up 74.5%
National Petroleum Corporation                   investment was curbed by the               of the total value of the newly signed
(CNPC) and China Energy Company                  government as non-financial direct         contracts. The value of export driven
Limited (CEFC)’s joint acquisition of            investment in 174 countries and            by foreign contract projects was
a 12% stake in Abu Dhabi National                regions, 6,236 overseas companies          US$15.39 billion.
Oil Company (ADNOC) for US$2.8                   amounted to US$120.08 billion, a year-
billion. The turnover of the overseas            on-year decrease of 29.4%. In terms        Outlook of China Outbound
contracted projects along the B&R                of the composition, investment in          Investment
amounted to US$85.53 billion, up                 equity and debt instruments reached        In November 2017, Premier Li Keqiang,
by 12.6% year-on-year, taking up                 US$102.08 billion, a year-on-year          pointed out that “It is estimated that
50.7% of the turnover of all overseas            decrease of 32.9%, accounting for 85%      in the coming five years, China will
contracted projects during the same              of all investment. Reinvested income       import US$8 trillion worth of goods,
period. The total value of the newly             achieved US$18 billion, equalling          receive US$600 billion of foreign
signed contracts along the B&R                   the investment last year, accounting       investment, and make US$750 billion
reached US$144.32 billion, up by                 for 15% of all investment. Foreign         of outbound investment. And there
14.5% year-on-year, occupying 54.4%              investment mainly flows into leasing       will be 700 million visits by Chinese
of the total value of all newly signed           and business services, wholesale and       tourists to overseas destinations”
contracts in the same period.                    retail, manufacturing and information      at the 20 th ASEAN Plus China, Japan
                                                 transmission, and software and IT          and ROK Summit. By "Going Global",
Economic and trade cooperation                   services, accounting for 29.1%, 20.8%,     Chinese companies could realize their
along B&R was competitively effective.           15.9%, and 8.6% of all investment          shortcomings in local operations,
In 2017, China’s trade with the Belt             respectively. There were no new            learn from others strengths and close
and Road countries reached up to                 projects in real estate, sport and         the gap in between. Complement
7.4 trillion yuan with year-on-year              entertainment due to government            resources with capabilities is
growth of 17.8%. Construction of                 restristion.                               the top demand for outbound
major projects has also progressed.                                                         investment. Considering global
The Mombasa Port - Nairobi Railway,              Cross-border M&A activity remained         economic situations, B&R Initiative,
initial segment of East Africa railway           active in 2017. Chinese business had       regulatory policies and the influence
network, opened to traffic. The first            a total of 341 M&A projects overseas,      of innovative technologies, Deloitte
tunnel along China – Laos Railway                with an actual transaction value of        comes up with the following opinions
has been bored through successfully.             US$96.2 billion, involving 18 industries   on outbound investment trend in
First-stage of China – Thailand                  over 49 countries and regions. Among       2018:
railway started construction. And                them, domestic direct investment
                                                                                            •• One could assume that in 2018 the
the Hungary – Serbia railway project             projects and overseas financing
                                                                                               synchronized recovery of OECD
and Karachi expressway project                   projects totaled at US$21.2 billion
                                                                                               countries will continue and major
are pushing through smoothly.                    and US$75 billion, taking up 22% and
                                                                                               central banks' tightening of the
Great breakthroughs were made                    78%, respectively. Total turnover of
                                                                                               money supply will be gradual (both
as for Free Trade Zone. Free Trade               foreign contracted projects reached
                                                                                               assumptions are sensible). It is also
agreements were signed with Georgia              US$168.59 billion with a year-on-year
                                                                                               quite probable that the renewed
and Maldives and negotiations have               growth of 5.8%. Newly signed foreign
                                                                                               strength of the dollar and event risk
started with Moldova and Mauritius,              contracted projects increased, totaling
                                                                                               (e.g. a hard Brexit) could well keep
and RCEP negotiation has made                    at US$265.28 billion with a year-on-
                                                                                               a lid on any rally of the Euro, thus
positive progress.
                                                                                               allowing the Fed to increase short-
                                                                                               term interest rates in a measured
                                                                                               fashion. The above scenario, which
                                                                                               is entirely plausible, would be
                                                                                               positive for China. However, since

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2018 Deloitte Outbound Investment Guide for Chinese Businesses

 already in 2017 the vastly improved           increase its presence along the B&R
 fortunes of the developed countries           out of concerns of geopolitics and
 resulted in a favourable backdrop             financial risks.
 for China's external sector, can
                                             •• Opportunities and risks coexist
 Chinese exporters really repeat their
                                                along the B&R. Investors must
 sterling performance in 2018, on a
                                                look at projects from long-term
 relatively strong base of 2017? It is
                                                perspective. Risks should not be
 challenging. In addition, the Trump
                                                underestimated, or overestimated.
 Admiration's pressure on China
                                                B&R Initiative therefore will
 in terms of bilateral trade deficit
                                                undoubtedly continue to prevail.
 reductions will not go away.
                                                In May 2015, NDRC estimated that
•• B&R Initiative is of increasing              Chinese outbound investment
   significance. Instead of limiting            would reach a total volume of
   B&R Initiative to a strategy serving         US$600–800 billion in the next five
   Chinese companies only, China is             years, with many of which flew into
   intentionally blurring the concept           countries along the B&R. In October
   to encourage more involvement                2017, B&R Initiative was included
   from related countries and regions           into the CPC Constitution, which
   around the globe. Reforms are                showed B&R Initiative’s deep policy
   taking place too in terms of target          implications and encouraged more
   industries. At the beginning, B&R            companies to participate.
   Initiative was featured by long-term
                                             •• Capital control will continue. The
   infrastructure investment projects,
                                                new Administrative Measures for
   profiting mainly SOEs in China.
                                                Enterprise Outbound Investment
   Now, investments are expanding                                                  st
                                                would come into effect on March 1 ,
   into trade, manufacturing, IT and
                                                2018. Under the new regulations,
   tourism, enabling companies to
                                                investments in sensitive sectors
   benefit from B&R Initiative in the
   near future. Besides, China must

Figure 3 China’s non-financial ODI dropped by more than 30%

US$ 100 million                                                                Growth rate

2,000                                                                               60.0%
1,800                                                    49.3%                      50.0%
1,600                                                                               40.0%
1,400                                                                               30.0%
1,200         15.6%                               1812                              20.0%
1,000                             13.3%                                             10.0%
 800                                                                                 0.0%
 600                                                                   1201         -10.0%
                               1180
 400          1028                                                                  -20.0%
 200                                                                                -30.0%
                                                                           -33.7%
    0                                                                               -40.0%
              2014             2015               2016                 2017
                                                                 Growth rate

Source: MOFCOM, Deloitte Research
                                                                                         7
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2018 Deloitte Outbound Investment Guide for Chinese Businesses

    must be checked by NRDC and                    equity investment funds will              •• Projects that focus on the future
    those in non-sensitive sectors                 continue to be restricted.                   and technological innovation are
    should file records according to                                                            favoured. Chinese investors of the
                                                 •• Internet companies like Baidu,
    the value (no record-filing required                                                        new generation are determined
                                                    Alibaba and Tencent (BAT) would
    for investment below US$300                                                                 to promote social progress and
                                                    play significant roles in outbound
    million). However, capital control                                                          improve living standards through
                                                    investment. Emerging Internet
    as a whole is still a temporary                                                             technological products. Therefore,
                                                    companies represented by BAT
    measure, as all forms of control                                                            they invest heavily in frontier science
                                                    is expanding their investment to
    are bad for state owned economy                                                             and technology fields, such as
                                                    Silicon Valley in search of high-
    and private economy. China’s                                                                artificial intelligence, biotechnology,
                                                    quality start-ups. They will initiate
    economic transformation should                                                              etc. Chinese investors are also
                                                    a third wave of investment boom,
    focus on further deleveraging and                                                           willing to transform traditional
                                                    following the ones started by SOEs
    encouraging outbound investment                                                             industries, such as real estate,
                                                    and private enterprises. Internet
    rather than addressing GDP growth.                                                          energy, and manufacturing which
                                                    companies lay great emphasis on
    Otherwise, exchange rate of RMB                                                             have already faced a capital surplus,
                                                    strategic blueprint of investment
    need further adjustment.                                                                    through advanced technologies and
                                                    (Baidu’s acquisition of mobile
                                                                                                new ideas. The trend in the next
•• Investments in sensitive sectors will            security company TrustGo, Tencent's
                                                                                                five to ten years is to invest in high-
   continue to be strictly controlled.              investment in Online design
                                                                                                value projects overseas and open
   The new list of sensitive sectors                retailer Fab, Alibaba's investment in
                                                                                                up global markets through venture
   for outbound investment would                    Mobile App Search Engine Quixey,
                                                                                                investment funds, industrial funds,
   come into effect on 1st March, 2018.             Messaging App Tango and Smart
                                                                                                and M&A funds.
   Irrational investment overseas                   Remote App Peel etc.), representing
   in properties, hotels, cinemas,                  a change of "Made in China" from
   entertainment, sports clubs and                  cheap commodities to innovative
                                                    products.

Figure 4 Greater China Outbound M&A Overview: 2005 – 2017

US$ billion                                                                                                            Number of Deals

    250                                                                                                         480               500
                                                                                                                          436

    200                                                                                               375                         400

                                                                                             293
    150                                                                                                                           300
                                                                                      237

    100                                                               190     186                                                 200
                                                            148
                                                   110
                               92       88
    50     64        70                                                                                                           100

     0                                                                                                                            -
          2005     2006      2007       2008      2009      2010      2011    2012    2013   2014     2015      2016      2017
                                           Q1       Q2           Q3     Q4 Deal Value(LHS)   Deal Value(RHS)

Source: Mergermarket
Note: 1) Greater China refers to Mainland China, Hong Kong, Macau and Taiwan. 2) Deal volume includes the number of
announced/completed deals with disclosed and undisclosed values during the period stated. 3) Deal value includes the value of
announced/completed deals with disclosed values during the period stated.
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2018 Deloitte Outbound Investment Guide for Chinese Businesses

After record-breaking year in terms of
outbound M&A transaction value and deal
volume, China witnessed a relative slowdown
in 2017 with only US$140.7 billion worth
(dropped 32.6% from 2016) of 436 (dropped
9.2% from 2016) announced Chinese
outbound M&A deals. The tightened
regulatory oversight governing capital
outflows has cooled off some Chinese
investors' spending sprees in investing
abroad.

3.Greater China Outbound M&A            The announced outbound M&A deal
Review                                  value contracted from US$208.7
The landscape in China, however,        billion in 2016 to US$140.7 billion
remains conducive to Chinese            in 2017, attributable to the decline
companies in making overseas            of mega deals (over US$1 billion)
acquisitions or investments,            from 39 in 2016 to 29 in 2017. The
particularly with a range of supportive notable ChemChina-Syngenta deal,
incentives and policies (such as Belt the country's largest outbound deal in
& Road Initiative) rolled out by the    history, fueled the overall deal value in
government.                             2016 with US$43 billion.

Looking ahead, despite the drop in       Overseas targets in Consumer &
2017, we expect the China outbound       Industrial Products (C&IP) remained
M&A momentum will rebound and            attractive to Chinese investors. In
remain strong and may reach a new        2017, the largest two announced
high in 2018.                            outbound M&A deals were in
                                         Transportation sector: 1) the US$13.8
                                         billion acquisition of UK-based
                                         LogiCor Europe Limited by China
                                         Investment Corporation (CIC), the
                                         Chinese sovereign wealth fund, from
                                         Blackstone Group; and 2) the US$11.6
                                         billion acquisition of Singapore-listed
                                         Global Logistic Properties (GLP) by a
                                         consortium led by China Vanke.

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2018 Deloitte Outbound Investment Guide for Chinese Businesses

Figure 5 Greater China Outbound M&A by Target Region: 2016 vs 2017

                                                                 Europe
                                                                 deal value (US$ billion)
        North & Central America
                                                                 100
        deal value (US$ billion)

        80                                                       80

                                                                 60
        60
                                                                 40
        40
                                                                 20                                     80
        20
                                                                  0                                     60
                                                                      2016 2017
              2016     2017                                       United Kingdom
                                                                                                        40
             United States America                                Germany
             Canada                                               France                                20
             Rest of North Central America                        Central & East Europe
                            South America                         Rest of Europe                         0
                            deal value (US$ billion)                                                          2016    2017
                           15                                            Middle East & Africa
                                                                         deal value (US$ billion)            Australia
                                                                          16
                            10                                                                               South East Asia(SEA)
                                                                          12                                 Japan
                             5
                                                                           8

                             0                                             4
                                   2016 2017
                                 Brazil                                    0
                                 Rest of South America                           2016    2017
                                                                               Africa
                                                                               Israel
                                                                               Rest of Middle East

Source: Mergermarket
Notes: 1) Greater China refers to Mainland China, Hong Kong, Macau and Taiwan. 2) Deal value includes the value of announced/
completed deals with disclosed values during the period stated.

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2018 Deloitte Outbound Investment Guide for Chinese Businesses

Boosted by the largest Chinese               Aggregated Chinese outbound deal
outbound deal in 2017 (China Vanke-          value in United States of America
GLP deal), Southeast Asia was the            dropped significantly from US$59.5
most favorite destination region             billion in 2016 to US$11.8 billion in
in terms of deal value with over             2017, attributable to fewer mega
US$33 billion worth of Chinese deals         deals announced in 2017. In 2016,
announced.                                   two notable deals included Avolon
                                             Holdings' US$10 billion takeover of
Australia, with aggregated US$18.8           CIT Commercial Air Unit and HNA's
billion of Chinese outbound deals            US$6.5 billion acquisition of 25% stake
announced, ranked as the second              in Hilton Worldwide.
most active destination in terms of
deal value in 2017, partly attributable      Brazil has been one of the
to the US$5.6 billion takeover of            destinations for Chinese acquirers
power provider Duet Group by                 seeking for Energy & Resources
Hong Kong-based Cheung Kong                  targets. State Grid acquired CPFL
Infrastructure (CKI) as well as the          Energia S.A. in 2 phases: 54.64%
US$3.1 billion acquisition of Alinta         stake in 2016 for US$9 billion and the
Energy by Hong Kong conglomerate             remaining 45.36% in 2017 for US$4
Chow Tai Fook (CTF).                         billion.

In 2017, United Kingdom attracted            Chinese investors have their eyes
a total of US$18.3 billion worth of          in Israel for companies mainly in
Chinese M&A investments, largely             innovative technology and consumer
attributable to the sale of UK-based         products sectors. While a number
LogiCor Europe Limited to CIC for over       of small deals were announced in
US$13 billion.                               2017, two notable deals aggregated
                                             to over US$8 billion were announced
                                             in 2016: 1) US$4.5 billion acquisition
                                             of Israeli social game developer
                                             Playtika by a Chinese consortium
                                             led by Giant Network Group; and
                                             2) the US$3.9 billion acquisition of
                                             ADAM Agricultural Solutions by Hubei
                                             Sanoda.

                                                                                        11
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Figure 6 Greater China Outbound M&A by Target Industry: 2015 – 2017

US$ million

                                  $85,272
          $17,814
                                   21
                        53
                                  375 deals                  $32,645
                   6
                                                                                                         $208,659
                                   2015                                             $18,425
                   64                               206

                                                                              $28,675                    29
     $20,299                                                                                   49
                             25
                                                                                                     480 deals
                                                                                          12
                                                    $3,816
                        $430              $10,268
                                                                           $7,022                        2016                  $104,346
                                                                                                                         260
                                                                                          98

                                                                                                    32
                                                                                $44,737

                                   $140,674
              $6,740
                                                                                                              $5,454

                                   26
      $36,715
                        47
                                  436 deals
                    7
                                                              $67,035

                                    2017
                   75                                231

     $2,079
                             50

           $19,036

                                        $9,069

     Consumer & Industrial Products                   Life Sciences & Health Care                   Technology, Media & Telecommunications

     Real Estate                                      Energy & Resources                            Financial Services

Source: Mergermarket
Notes: 1) Greater China refers to Mainland China, Hong Kong, Macau and Taiwan. 2) Deal volume includes the number of
announced/completed deals with disclosed and undisclosed values during the period stated. 3) Deal value includes the value of
announced/completed deals with disclosed values during the period stated.

12
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Volumes of Chinese outbound                      particularly in developed countries,               51% stake in UK-based Global Switch
Consumer & Industrial Products                   as evidenced by the increased deal                 Holdings for US$4 billion. Two mega
(C&IP) announced deals remained                  volume in 2017. Representative                     deals in 2017 were the 3.1 billion
strong and consistently accounted                announced deal in 2017 included                    acquisition of Sharp Corporation by
for over 50% of respective year's total          the acquisition of 93.37% stake in                 Taiwan-based ES Platform and the
outbound deal volume during 2015                 Singapore-based medical device                     US$2.5 billion investment Singapore's
– 2017. Significant total announced              maker Biosensors International by                  ride-hailing company Grab by Didi
outbound C&IP value of US$104.3                  Shenzhen-listed Blue Sail Medical for              Chuxing-led consortium.
billion in 2016 was primarily due to the         US$1.2 billion.
striking of US$43 billion ChemChina-                                                                Despite volume declined, the value
Syngenta deal in 2016. After                     Only US$19.0 billion worth                         of outbound Energy & Resources
normalizing the impact of such mega              of Technology, Media &                             (E&R) deals increased from US$28.7
deal, the total outbound C&IP value              Telecommunications (TMT) deals                     billion in 2016 to US$36.7 billion in
in 2017 would have increased by 0.9%             announced in 2017, a sharp decline                 2017. Key deals announced in 2017
from 2016.                                       of 57% from 2016 (US$44.7 billion).                included: US$9.1 billion acquisition of
                                                 In 2016, Chinese TMT players made                  14.16% stake in Russia-based Rosneft
With keen intention to uplift                    bold moves: Tencent acquired 84.3%                 Oil by CEFC China Energy and the
technological knowhow at home,                   stake in Supercell Oy in Finland for               acquisition of 70% stake in Myanmar's
Chinese acquirers exhibited growing              US$8.6 billion, Giant Networks agreed              Kyauk Pyu Port by a consortium led by
interests in overseas Life Sciences              to acquire Israeli Playtika US$4.5                 CITIC for US$7.3 billion.
& Health Care (LSHC) targets,                    billion, and Elegant Jubilee acquired

Figure 7 Greater China Outbound M&A by Target Sector: 2016 vs. 2017

No. of Deals                     C&IP                                      LSHC                     TMT              RE          E&R     FSI

90
                                                            81
80                                                               75
                                 67                                                       69
70
60                                                                                             58
          48                          46                                                                                         49 47
50   44
40
                                                                           27                                                            29 26
30             23 24                                                                 23
                                           21                                                        18
20                     16                       17                    18
                            11                                                  14                            11 8     12
10                                                   8 10                                                 9                 7
-
     Co rod

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     Ch ec

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        fe
        du ic
        av r v

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        ed

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         ch
         P

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                          e

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                                        al

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                                          &
                                           s

                                        2016 Deal Volume                    2017 Deal Volume
Source: Mergermarket
Notes: 1) Greater China refers to Mainland China, Hong Kong, Macau and Taiwan. 2) Deal volume includes the number of
announced/completed deals with disclosed and undisclosed values duringthe period stated.

                                                                                                                                               13
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Figure 8 Greater China Outbound M&A by Target Region and Target Industry: 2017

                                           C&IP         LSHC     TMT     RE     E&R        FSI

                   Southeast Asia          26           3        10      1      8          11        59           13.5%

Asia               Australia               23           3        1       -      9          2         38            8.7%
Pacific            Japan                   8            4        3       2      -          -         17            3.9%

                   Rest of Asia Pacific 19              -        12      -      4          1         36            8.3%

                   Germany                 31           3        -       -      1          -         35            8.0%

                   United Kingdom          15           2        9       -      3          1         30            6.9%

                   France                  9            1        2       1      -          -         13            3.0%
Europe
                   Central & East
                                           9            1        1       -      -          -         11            2.5%
                   Europe
                   Rest of Europe          33           8        6       2      3          8         60           13.8%

                   Africa                  2            -        -       -      5          -         7                 1.6%
Middle
East &             Israel                  2            2        2       -      1          -         7                 1.6%
Africa
                   Rest of Middle East 3                -        1       -      3          -         7                 1.6%

                   United States of
                                           37           22       22      -      3          2         86           19.7%
                   America
North &
Central            Canada                  4            1        5       1      1          -         12            2.8%
America
                   Rest of North &
                                           2            -        1       -      -          1         4             0.9%
                   Central America
                   Brazil                  4            -        -       -      3          -         7                 1.6%
South
America            Rest of South
                                           4            -        -       -      3          -         7                 1.6%
                   America

                   Total                   231          50       75      7      47         26        436         100.0%

                   %                       52.9%        11.5%    17.2%   1.6%   10.8%      6.0%      100.0%

Source: Mergermarket
Notes: 1) Greater China refers to Mainland China, Hong Kong, Macau and Taiwan. 2) Deal volume includes the number of
announced/completed deals with disclosed and undisclosed values during the period stated.

14
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Despite measures imposed in the            Looking ahead, we expect Chinese             "bringing in" and "going global," follow
second half of 2017 which pulled           acquirers continue to seek for overseas      the principle of achieving shared
a brake on the heated outbound             targets in developed countries in the        growth through discussion and
activities, the Chinese government         following sectors:                           collaboration, and increase openness
is still very supportive for Chinese                                                    and cooperation in building innovation
                                           •• Consumer products
acquirers in carrying out overseas                                                      capacity. "It is indicated that under the
investments actively but prudently. The    •• Life sciences                             guidance of the Initiative, China does
overarching theme of the guidelines        •• Health care                               not only focus on the exploration
promotes Chinese companies to                                                           of overseas markets and the idea
expand abroad, transform through           •• Technology                                of "going global" is proposed for
collaboration, and uplift capabilities     •• Automotive                                attracting more foreign investments
and quality by bringing the advanced                                                    and for more efficient allocation
                                           •• Energy
technologies and knowhow back home:                                                     of global resources. Besides, the
                                           Nevertheless, outbound investments
                                                                                        Initiative serves as a new platform
•• Extend economic influence through       in "unrelated" sectors and "prohibited"
                                                                                        of cooperation for win-win results
   infrastructure investments and          sectors (such as casino, entertainment,
                                                                                        through discussion and collaboration,
   projects along the One Belt One         real estate, etc.) are not encouraged.
                                                                                        rather than a program/mechanism
   Road regions and countries
                                                                                        imposed on other countries. The
•• Expand and export China's               4.The Belt and Road Initiative
                                                                                        initiative should be an effective
   production capacity, equipment and      to Drive a New Chapter of
                                                                                        approach to building a community of
   technical standards                     Globalization
                                                                                        shared future.
                                           2018 marks five years since Chinese
•• Transform and uplift capabilities
                                           President Xi Jinping put forward
   through collaboration with overseas                                                  Deloitte observed that B&R Initiative
                                           the Belt and Road Initiative (B&R
   companies with advanced and                                                          welcomes the participation of all
                                           Initiative). During the past years, the
   innovative technologies                                                              countries but it attaches more
                                           Initiative has been put into practice,
                                                                                        importance to the construction
•• Explore natural resources abroad to     making an increasing impact in the
                                                                                        of key areas and major projects.
   help boosting economic growth in        world. Now China has entered a new
                                                                                        Taking capacity cooperation projects
   domestic market                         era where it looks to move from
                                                                                        for example, key construction areas
                                           high-speed to high-quality growth.
•• Expand foreign cooperation in                                                        covers 46 countries. Among them
                                           Chinese outbound investment also
   agriculture and food chain sector for                                                the 15 countries nearby China,
                                           drives a new chapter of globalization
   enhancing the safety and quality of                                                  including Kazakhstan, serve as the
                                           along with the expansion and further
   food and ensuring sufficient supply                                                  Main Axis, with 24 African, Middle
                                           development of the Initiative.
   domestically                                                                         East and Central European countries,
                                           At the 19 th CPC National Congress
                                                                                        including Ethiopia, Zimbabwe, Iran
                                           convened in October last year,
                                                                                        and Romania, as the West Wing, and
                                           President Xi stressed that "We should
                                                                                        6 Latin American countries, including
                                           pursue the Belt and Road Initiative
                                                                                        Brazil and Chile, as the East Wing.
                                           as a priority, give equal emphasis to

                                                                                                                                   15
2018 Deloitte Outbound Investment Guide for Chinese Businesses

The B&R Initiative looks beyond                    throughout the industry chain and         market, making it become the
infrastructure projects and will                   bring concrete economic benefits          most-favored market entry mode
expand its development to other                    and job opportunities to local            for multinationals and investors.
industries and sectors. In the past few            communities. The goal of "the new         M&A also enable investors to
years when the Initiative was at the               chapter of globalization" powered         acquire the core competencies and
early stage, most B&R countries had                by the Initiative is to seek mutual       other intangible assets of the target
an urgent demand for infrastructure                benefits and common development           companies, including research
construction and thus achieved the                 rather the establishment of an            and development capabilities,
most outstanding performance in                    exclusive trade-protected zone.           trademark, reputation, technologies,
the infrastructure industry. Deloitte                                                        management and distribution
                                                 •• Bring on board diversified
noticed that, however, the growth in                                                         channels, as well as to improve their
                                                    shareholders and partners
other industries and sectors, such                                                           business portfolios through cross-
                                                    While Chinese state-owned
as trade, finance, Internet, culture,                                                        industrial cooperation.
                                                    Enterprises took the lead in the
education and tourism, increased
                                                    development and investment of           •• Stricter supervision leading to
gradually. In terms of the international
                                                    the B&R Initiative projects at the         quality overseas investments
production capacity cooperation
                                                    early stage, more and more private         with higher returns
projects, both traditional and new
                                                    and foreign-funded enterprises are         The supervision department have
emerging industries will see new
                                                    now engaged in the Initiative. Plus,       taken measures to curb ''irrational''
opportunities in the foreseeable
                                                    for risk mitigation and sustainable        overseas investment and improve
future. It can be predicted that as
                                                    development in the destination             the alignment of investments with
the priorities of China's and other
                                                    countries, enterprises are likely to       the overall B&R strategy. Most
countries' development may vary from
                                                    form joint ventures or other kinds of      Chinese companies, in response,
year to year, both sides will strengthen
                                                    cooperative relationship with local        have improved their awareness of
their cooperation in more and more
                                                    partners.                                  risk management and capabilities of
diversified industries and sectors.
                                                                                               transnational operations. From long-
                                                 •• Cross-border M&A to replace the
                                                                                               term perspective, China will continue
In the course of in-depth development               green field investment as the
                                                                                               to expand its global investment
of the B&R Initiative, four key trends in           major market entry mode
                                                                                               scope and upgrade its investment
globalization and China outbound                    Compared with other investment
                                                                                               structure, leading to higher quality
investment are summarized as                        modes, cross-border M&A can
                                                                                               and returns of Chinese outbound
follows:                                            offer most investors, who want to
                                                                                               investments and improved strategy
                                                    accelerate their global journeys,
•• Improvement of bilateral                                                                    of resource allocation.
                                                    a quick access to the destination
   and multilateral cooperation
   mechanisms to drive "a new
   chapter of globalization"
   Under the cooperation model
   proposed by the B&R Initiative,
   globalization is no longer only
   about the relocation of production
   bases from high-cost to low-cost
   areas, which gives rise to the job
   opportunities transfer. Enterprises
   should align themselves with the
   development strategy of the region
   they invest in and create synergies
   between upstream and downstream
   enterprises by transferring a major
   portion of their procurement,
   production, and sales to the
   region, so as to build an ecosystem

16
2018 Deloitte Outbound Investment Guide for Chinese Businesses

5.Considerations and Preparations              3). Overseas engineering
before Chinese Outbound                            contracting is an integrated
Investment                                         international economic cooperation
Chinese companies may face various                 method, which refers to
risks in every phase of an overseas                engineering projects delegated
investment, including challenges in                by foreign government, company
project research, bidding, negotiation,            or project owner to a project
signing, closing and operation, as                 contractor and the contractor shall
well as obstacles due to the foreign               conduct the engineering according
culture, legal system and political                to the rules applicable.
risks. In light of the above, it is
necessary for Chinese companies to             Process for Chinese outbound
conduct risk evaluation based on their         investment - approval and
individual situation before conducting         recordation
overseas investment.                           1). National Development and
                                                   Reform Commission (NRDC)
Before conducting overseas                         Overseas investment projects
investment, every company should                   subject to approval are sensitive
ask itself three questions, based on its           projects carried out by investors
individual situation.                              either directly or through overseas
                                                   enterprises controlled thereby. The
•• What is our development strategy?
                                                   approval authority is NDRC. Sensitive
•• What can we get from investing or               projects refer to projects involving
   acquiring the target company?                   sensitive countries and regions;
                                                   and projects involving sensitive
•• Why is the target company an
                                                   industries.
   eligible investing/acquiring target for
   us?
                                                   Projects subject to filing are non-
                                                   sensitive projects directly carried
Major forms of cross-border
                                                   out by an investor, namely the
investment for Chinese businesses
                                                   non-sensitive projects involving
1). Under Greenfield investment,
                                                   the direct investment of assets and
    company shall set up new entities,
                                                   equities or the provision of financing
    including sole proprietorship and
                                                   or guarantees. For a project requiring
    joint venture, according to local
                                                   filing, the authority in charge of
    laws. If allowed, investment entity
                                                   filing is (i) NDRC, if the investor is a
    can be set up by way of contract.
                                                   centrally administered enterprise
2). Merges & Acquisitions (M&A)
                                                   (a centrally administered financial
    is the primary form for Chinese
                                                   enterprise or an enterprise directly
    outbound investment. The
                                                   subordinate to the administration by
    prerequisite for M&A is sourcing
                                                   the State Council or its subordinate
    the eligible overseas target. M&A of
                                                   organ, the same below); (ii) NDRC, if
    an overseas company is conducted
                                                   the investor is a local enterprise and
    by acquiring the local enterprise by
                                                   the amount of Chinese investment
    obtaining the ownership or control
                                                   is $0.3 billion or above; and (iii) the
    of the target company, mainly in the
                                                   provincial development and reform
    form of equity M&A or asset M&A.
                                                   authority at the place where the
                                                   investor is registered, if the investor is
                                                   a local enterprise and the amount of
                                                   Chinese investment is less than $0.3
                                                   billion.

                                                                                          17
2018 Deloitte Outbound Investment Guide for Chinese Businesses

2). The Ministry of Commerce of                  4). State-owned Assets Supervision             6). Other related departments
    the People's Republic of China                   and Administration Commission                  In addition to procedures mentioned
    (MOFCOM)                                         of the State Council (SASAC)                   above, overseas investment projects
    The Ministry of Commerce and the                 Overseas investment conducted                  may also need approvals and
    provincial commerce authorities                  by solely state-funded enterprises,            supports from Ministry of Land and
    shall implement filing or approval               solely state-funded companies or               Resources, Ministry of Finance, State
    respectively based on different                  state-holding/state-participating              Administration of Taxation, General
    circumstances of overseas                        companies (SOEs in general) shall be           Administration of Customs and
    investments of enterprises.                      approved, examined and approved                Ministry of Foreign Affairs.
                                                     or recorded by SASAC as the case
     •• Overseas investment involving
                                                     may be.                                    Legal risks for Chinese outbound
        sensitive country/region or
                                                                                                investment
        sensitive industry shall be subject        •• Central state-owned enterprises
                                                                                                1). Political risk is a type of risk that is
        to approval.                                  should file annual outbound
                                                                                                    due to the changes of the political
                                                      investment plan to SASAC and get
     •• Overseas investment under other                                                             circumstances, unstable political
                                                      approval.
        circumstances shall be subject to                                                           status, changes of legislations and
        filing.                                    •• Investment projects excluded in               policies in the country where the
                                                      annual investment plan of the                 investor locates and where the target
     •• Countries where overseas
                                                      central state-owned enterprises               locates, an investment company may
        investment shall be subject to
                                                      shall be recorded and approved by             suffer economic losses.
        approval are countries without
                                                      SASAC.
        a diplomatic relation with China
        and countries sanctioned by the            •• Confirmation process of outbound              Types of political risks: expropriation,
        UN. When necessary, the Ministry              investment from local state-owned             breach of contract by target country,
        of Commerce may announce                      enterprises shall comply with                 foreign exchange restrictions, strikes,
        separately a list of countries and            regulations of local SASACs.                  wars, political riots, insurance claim
        regions where overseas investment        5). Anti-monopoly Bureau of                        settlement etc.
        shall be subject to approval.                 MOFCOM                                    2). Business risk is the intrinsic risk
                                                      Chinese companies may trigger                 when conducting business overseas.
     •• Industries in which overseas
                                                      the concentration of undertakings
        investment shall be subject to
                                                      declaration obligation, when                 Types of business risks: ambiguous
        approval are industries involving
                                                      acquiring all or part of equities or         contract arrangements, credit flaw
        the export of products and
                                                      assets of foreign companies.                 of the other contracting party,
        technologies restricted by the
                                                                                                   independence of first demand
        China from export and industries
                                                     A concentration of undertakings               guarantee etc.
        which affect the interests of more
                                                     means any of the following:
        than one country (region).
3). State Administration of Foreign                  •• Merger of undertakings;
    Exchange (SAFE):
                                                     •• Obtaining control over other
     According to the Circular on Further
                                                        undertaking(s) by an undertaking by
    Simplifying and Improving Policies for
                                                        acquiring equities or assets;
    Foreign Exchange Administration for
    Direct Investment, a relevant market             •• Obtaining control over, or the
    entity can choose a bank at the place               possibility of exercising decisive
    of its incorporation for registration               influence on other undertaking(s)
    of foreign exchange for direct                      by virtue of contract or by any other
    investment. After the registration, the             means.
    entity is allowed to open accounts,              In practice, however, whether a
    and remit funds (including outward               M&A constitutes concentration of
    or inward remittance of profits or               undertakings shall be determined
    dividends), which are related to direct          based on different circumstances.
     investment.

18
2018 Deloitte Outbound Investment Guide for Chinese Businesses

3). Tax risk/foreign exchange risk                Preventive measures:
    are the risk that the acquiring
                                                  •• Have a comprehensive
    company of an overseas target
                                                     understanding of local laws and
    may have unforeseen adverse tax
                                                     regulations in relation to labor
    consequences due to the unfulfilled
                                                     relations and dispute resolution
    tax related obligations by the
                                                     procedures.
    target company and the risk of an
    investment's value changing due to            •• Gain deep insights about cultural
    the changes of currency exchange                 background regarding labor
    rates and interest rate.                         relations; conduct comprehensive
                                                     assessment and forecast of
    Preventive measures: conduct tax                 related labor risks involved in an
    due diligence, consider taxation                 M&A transaction, based on a full
    regulations and depreciation                     grasp on background and laws
    regulations of acquired assets, use              mentioned above.
    financial tools to prevent losses             •• In the post-merger integration
    related to fluctuation of exchange               stage, Chinese investors shall
    rate and interest rate, use RMB as the           disentangle original labor relations
    currency of settlement during M&A if             in accordance with local laws and
    possible.                                        culture, and settle labor dispute
4). Labor law risk is the risk that an               according to effective laws and
    investor shall pay attention to when             dispute settlement mechanism
    it conducting overseas operation                 after dispute.
    and employ local workforce.               5). Intellectual Property Rights
    The main risks include: wages/                (IPR) risk refers to the intellectual
    compensations/transfers/discharges,           property rights disputes involved in
    etc. and different approaches                 an overseas M&A transaction.
    to handle labor relations due to
    different employment regulations              Preventive measures: conduct IPR
    (e.g. minimum wages, collective               due diligence, analyze the risk of
    agreement etc.).                              infringing a third party's IPR, IPR
                                                  protection provisions in share/assets
                                                  purchase agreement, and manage
                                                  IPR effectively after closing.

                                                                                         19
2018 Deloitte Outbound Investment Guide for Chinese Businesses

Part II– Go Global
with Chinese
Companies
1.Challenges and Solutions for                       companies, it is advised that the
Chinese Outbound Investment                          enterprises should align their
In pursuit of understanding current                  restructuring plan with their overall
situation, challenges and prospect of                global strategy, and clarify the
Chinese overseas investment, Deloitte                rights and responsibilities of the
China surveyed 166 companies (51%                    units (departments) for higher
SOEs, 26% foreign-funded companies,                  management efficiency.
21% private sectors and 2% public                2). Overseas investment
institutions) from various industries,               destinations: State-owned
and found out challenges faced                       enterprises (SOEs) take lead in
by Chinese outbound investors as                     B&R Initiative while the private
follows,                                             and foreign-funded sectors
1). Organization structure: nearly                   focus more on developed
    80% of the Chinese enterprises                   markets
    have set up centralized or                       Southeast Asian, West Asian and
    decentralized organization                       African, South Asian countries
    structures for their                             are the most-favored investment
    international business while                     destinations of SOEs participating
    20% of them still not ready                      in the survey. The result of the
    The statistics shows that 78                     survey is consistent with that of
    percent of the enterprises                       2015, which well suggests that
    participating in the survey have                 SOEs, guided by the national
    restructured for global success,                 initiative, are and will continue to
    among which 38 percent have                      serve as the role of "group head" in
    established international business               the development of the Initiative.
    unit in different functions, 28                   Unlike SOEs, however, private and
    percent have set up independent                  foreign-funded enterprises pour
    departments for international                    more investments into developed
    business management and the                      regions such as the US and
    other 12 percent have formed                     European countries owing to the
    overseas subsidiaries (branches).                relatively low risks, mature market
    As there exists no single perfect                economies as well as the sound
    organizational structure for all                 legal systems in these countries.

20
2018 Deloitte Outbound Investment Guide for Chinese Businesses

3). Future overseas investment             4). Top 3 challenges faced by                     Regulation comes after risk as
    scale: over 50% of the                     Chinese overseas investors are                the second largest challenge
    enterprises will continue to               "risk, regulation and talent"                 facing outbound investors. Due
    expand their global business               A large number of cases have                  to the growing law enforcement
    while around 30% remain                    proved that no preparation for risk           efforts and increasingly strict
    unclear about their business               management, improper measures                 regulation on the investments at
    strategy to future overseas                to risk mitigation and no reflection          home and abroad, enterprises
    investments                                on risk coping are three major                become gradually aware that it is
    The statistics indicates that 60           reasons leading to the failure                crucial to obtain prior knowledge
    percent of the SOEs and 41 percent         of overseas investments. In the               of regulatory environment and
    of private enterprises will continue       context of the B&R Initiative, the            compliance operations in the target
    to expand their global business,           overseas investors shall consider             destinations.
    whereas nearly a half of the private       how to manage the risks from an           5). Pre-investment stage is the most
    enterprises remain unclear about           innovative perspective. It is far from        challenging in the full lifecycle of
    the business strategy towards its          enough for the investors to conduct           outbound investment
    future overseas investments. When          risk analysis on one-by-one basis             With Chinese companies' in-depth
    going global, without the guidance         as the situations of countries along          development of global business,
    of clear and long-term business            the Belt and Road are complicated             the information asymmetry
    strategy, the companies are                and vary from country to country.             becomes one of the biggest
    prone to carry out impulsive and           Thus, following the comprehensive             barriers hindering enterprises
    short-term investments, ultimately         risk assessment, enterprises shall            from building a proper outbound
    resulting in economic loss.。               build a risk management system                investment strategy. When
                                               involving risk identifying, warning           conducting due diligence, the
                                               and coping, tailored to their
                                               business plans.

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2018 Deloitte Outbound Investment Guide for Chinese Businesses

     enterprises can leverage the                 6). Business risk allocation and
     global network and channels of                   sharing are key considerations
     international professional services              in project financing
     organizations to collect necessary               More enterprises attach
     and detailed information on                      emphasis on the risk sharing and
     investment destinations and                      improving project bankability.
     the predicted returns on the                     When enterprises invest in the
     investment targets.                              infrastructure and energy projects
                                                      in particular, they shall build a well-
     The challenges occurred in                       structured business architecture
     the "investment" and "post-                      and more importantly, ensure the
     investment" stage also shall not                 minimum guarantee and limited
     be underestimated. During the                    recourse debt by any means.
     investment, although most of the             7). Global talent management: it is
     companies have already actively                  crucial to make best endeavors
     carried out the “localization                    to develop global talent through
     operations", the headquarters                    various approaches and
     shall to some extent strengthen                  programs
     their management capabilities for                International talent pooling and
     specific projects and subsidiaries               development requires long-term
     (branches). With regard to the                   efforts. To stand out in the fierce
     "post-investment" phase, improving               competition for global talent
     the abilities of integration, business           resources, more endeavors should
     continuity management, as well                   be made to attract and develop
     as evaluation and supervision                    international talent through
     serve as the priorities for overseas             improved talent incentive and
     investors.                                       retention mechanism.

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2018 Deloitte Outbound Investment Guide for Chinese Businesses

To help Chinese companies address              projects and make adjustments,               the infrastructure and energy
the major challenges, Deloitte pro-            as well as improve and manage the            projects in the countries along
vides the following solutions and
                                               global portfolios based on the post-         the Belt and Road. On the basis
advice:
                                               investment summary.                          of local investment environment
1). Carry out a thorough and
                                           3). Adopt inclusive and diversified              and regulations, along with the
    comprehensive due diligence
                                               business models for local                    key characteristics of the projects,
    to identify various risks,
                                               management and develop                       Chinese companies shall propose
    understand regulatory
                                               overseas operational planning                a plan on investment structure
    compliance requirements and
                                               and long-term expansion                      and operation model, and leverage
    set up a coping plan before
                                               strategy simultaneously                      the overseas financing channel for
    kicking off the investment
                                               Chinese enterprises will                     tax savings and risk transferring.
    projects
                                               strengthen their management                  Plus, establishing a finance center
    Enterprises can deal with most
                                               on the subsidiaries (branches)               in Hong Kong can greatly facilitate
    challenges of "risk management" and
                                               and investment projects across               the financing and global portfolio
    "domestic and foreign regulatory
                                               the globe, and meanwhile the                 management.
    compliance" if they engage qualified
                                               management model and the role            5). Build new strategies for global
    professional organizations to carry
                                               of headquarters will definitely              talent pooling and development
    out a full and comprehensive due
                                               undergo a period of transformation           to map with the development
    diligence before investing overseas.
                                               to optimize the companies'                   the companies' global business
    Leveraging the global network
                                               allocation of global resources,              With Chinese companies' in-depth
    and professional expertise in
                                               through improved management                  development of international
    the investment destinations, the
                                               and mutual promotion between the             business, the current number
    organizations manage to assist
                                               overseas subsidiaries (branches)             quality as well as the structure of
    the companies with their pre-
                                               and investment projects. To                  talent can no longer meet the ends
    investment preparation.
                                               secure operational success in the            of the companies' requirements.
2). Build an investment
                                               destination markets, enterprises             Besides, the recruitment and
    optimization model to improve
                                               shall consider their level of                management of international
    their global business portfolios
                                               international business involvement           personnel have become the new
    based on analysis of their overall
                                               and then build clear outbound                challenges for most Chinese
    global business strategies
                                               business strategies, select the              companies. More new approaches
    During the "pre-investment"
                                               proper investment targets and                shall be explored, as it is evidently
    phase, enterprises shall evaluate
                                               design overall operation plan from           not feasible to copy the talent
    whether the investment projects
                                               product portfolio to value chain,            management and distribution
    are aligned with their long-term
                                               on the grounds of thorough due               model of the investment target
    business strategy. Apart from
                                               diligence, complete corporate                companies. In consequence, the
    before mentioned risk management
                                               strategy and knowledge about                 update of human resources system
    and regulatory, other factors
                                               overseas markets.                            and setup of new strategies to guide
    such as the role of projects in the
                                           4). Enhance cooperation with local               international talent pooling and
    whole portfolio and the layout
                                               governments and partners for                 development can make an impact
    of international business shall
                                               financing risk sharing and tax               on the companies' global journey in
    also be taken into consideration.
                                               savings                                      the long run.
    Facing a multitude of investment
                                               When investing abroad, enterprises
    opportunities, enterprises can take
                                               should innovate new financing
    advantage of the new technology—
                                               approaches, instead of relying
    big data to build a dynamic
                                               on the corporate guarantees.
    investment optimization model,
                                               Enterprises shall attach more
    by which enterprises can assess
                                               emphasis on the risk sharing and
    and select the proper projects,
                                               improving project bankability,
    analyze the returns on investment
                                               especially when carrying out

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