CNEI exits Liyuan despite metals price slump

Liyuan is China's leading manufacturer of aluminum extrusion products. This means it contributes to the bodywork of Volkswagen and Mercedez-Benz cars and metal casing on Apple computers. Demand for these goods is strong enough to withstand commodity price shocks.

"Movements in aluminum prices are neutral for Liyuan. It does not bear price risk in the aluminum sector but passes such risk to customers," says Johannes Schoeter, founding partner of CNEI. "This is an important reason why we invested in the company."

The investment came in 2008 as CNEI led a round of funding for Liyuan that also included two local investment firms, Shanghai Saijie and Jiangsu Xinchao Technology. The private equity player put in $7.5 million for a 16% stake, using capital from CNEI Fund I, a $113 million vehicle that closed in 2007.

With CNEI's help, Liyuan modernized its accounting systems, introducing stringent month-by-month budgeting, which included projections for profit and loss, cash flows and balance sheet levels. Improved control procedures for transaction processing were implemented, such as purchase-to-pay and order-to-cash business cycles.

CNEI also suggested Liyuan to adopt more conservative financial management practices. "We wanted them to focus on their core business so we asked them to stop trading aluminum futures," says Schoeter. "The quality of the management was decent. They were able to implement all the necessary changes."

A more tightly run Liyuan subsequently listed on the Shenzhen SME Board in November 2010. The stock closed at RMB44.60 on its first trading day, up 27.4% on the IPO price, and valuating the private equity firm's stake at $75.4 million.

Last June, CNEI sold 5% of its holding through block trades, generating proceeds of $29 million, which equates to a 9.4x gross return. Exiting the remainder was a bit more challenging. "The Chinese market was weak last year, so we had to wait until it bounced back," says Schoeter.

Having reached RMB11 last June when CNEI made its partial exit, Liyuan's stock slid to a low of RMB8.60 within five months. In 2013, there has been something of a revival, with the stock peaking at RMB14 in April. The private equity firm jumped at its chance to exit.

Although CNEI and Liyuan have now parted company, Schoeter says the investment thesis is just as strong today as it was five years ago - that China's long-term demand for extruded aluminum products in transportation, consumer electronics, and high-end construction remains fast-growing.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Exits
• Industrials
• Greater China
• CNEI
• China
• Exit
• Sell down
• manufacturing
• Commodities