Asia Pacific View August 2008

Asia Pacific View

Inside
Investment Banking overview

Key trends in Asia’s financial

institutions sector

Asia’s Telecoms sector in focus

Indonesia’s natural resources:

thermal coal heats up

The growing importance

of Sovereign Wealth Funds

Key questions on Global Inflation

UBS’s new Global Capital

Markets Group
Asia Pacific View August 2008

Welcome

Welcome to the first edition of the and we have aligned our global Financial As Robert Rankin, our Asia Head of
UBS Investment Banking Asia Pacific Institutions coverage. In China, with UBS Investment Banking, says, “UBS in Asia
View, which I hope you will find a Securities, we are in a strong position Pacific is firing on all cylinders”.
useful source of information, news to broker domestic debt and equity
and views on the region. In this underwriting and secondary I hope that you find this – and our
edition we focus on the diverse market trading. We now have a presence future updates – useful. I’d be very
Asian markets. in 22 locations across Asia Pacific. interested to hear your thoughts on the

“
topics covered and answer any questions
The economic impact of the sub- you may have so please do not hesitate
prime crisis, accelerating oil prices and We now have a to get in touch with me.
the threat of inflation are creating
huge uncertainty across global capital
presence in 22
markets. Our greatest challenge is to locations across
navigate this uncertainty and identify
the opportunities that changes in these Asia Pacific... and
markets create. In this first edition we
focus on Asia, providing insights into the
we have been named
most important trends and transactions the Best Investment
that have impacted these markets in
Bank in Asia 2008

”
recent months. Alex Wilmot-Sitwell

We have responded to the changing

by Euromoney. Chairman and CEO EMEA, UBS AG
Joint Global Head of Investment Banking
market conditions by adapting our
structure in ways that more closely unite We have completed more transactions in
the expertise and experience of our the region than any other investment bank
people. For example, we have integrated in the last three years and we have been
our equity and debt capital market groups named the Best Investment Bank in Asia by
into the Global Capital Markets Group Euromoney for the second successive year.


Asia Pacific View August 2008

Investment Banking overview

and private equity funds combined. In the backdrop of a very challenging
this issue, we will provide some analysis financial landscape. Because, despite the
as to what is driving them and what difficulties faced, it’s crucial to remember
future decisions they may take. that companies with strong management
and clear strategic direction were able –

“
and continue – to execute deals.
Benchmark financing deals for UBS
While in Europe clients include Want Want’s successful
and the US private USD 1,047 million IPO, where, despite
volatile market conditions, demand
equity deal-making outstripped supply by one and half
times. This deal was followed by Maoye’s
has slowed as the USD 345 million IPO.
availability of debt has While the equity markets will continue
been reduced this is

”
to offer challenges throughout the
remainder of 2008, there will still be
not the case in Asia. windows of opportunity to raise capital.
This will especially be the case in those
In this first edition of the UBS We also examine three of the region’s markets where issuers have recalibrated
Investment Banking Asia Pacific View most active sectors: financial institutions, their expectations of valuation in line
we aim to provide you with insight which will experience further and with the market’s views.
on the themes and trends that are necessary consolidation across the region;
influencing the future direction of the booming resources market, with Mergers and acquisitions activity in the
this dynamic region. particular focus on the opportunities in market remains positive. A review of
Indonesia’s thermal coal industry; and, investment banking data from Thomson
One such trend is clearly the rise of the finally, developments in the region’s Reuters shows that, unlike much of the
region’s Sovereign Wealth funds, which telecoms sector as global and local rest of the world, M&A in Asia Pacific
have been at the forefront of some of champions go head-to-head in the and Japan was up 8.7% in the first half
the major activity in the global financial search for growth. from the same period a year earlier.
markets over the last 12 months. Their We expect this positive momentum
importance is undeniable. In 2007 they While we are already well into the second to continue with regional champions,
accounted for 35% of global M&A half of 2008, it’s important to reflect on especially Indian and Chinese companies,
activity. They now have more assets the first half of the year and some of the seeking greater opportunities beyond
under management than hedge funds successes achieved by our clients against their borders.


Asia Pacific View August 2008

“It’s crucial to remember

Significant transactions include China In the financial sponsors space dialogue
Merchant Bank’s successful acquisition between these investors and companies
of Wing Lung Bank for USD 4.7 billion. also remains healthy and we remain that companies with
The deal is one of the most important bullish on private equity opportunities in
transactions of the year. In addition Asia. While in Europe and the US private strong management
to being the largest bank transaction
in Hong Kong for several years, it is
equity deal-making has slowed as the
availability of debt has been reduced,
and clear strategic
expected to trigger a wave of further this is not the case in Asia. Sponsors direction were able
consolidation across the Hong Kong have adapted a more flexible approach
– and continue – to

”
banking industry in the months and years to investing in growth through equity
ahead. Other important deals where UBS
played a key role include:
financings, private placements, block
sales and convertible bonds.
execute deals.
• China Telecom’s USD 15.8 billion For investment banking as a whole for
acquisition of China Unicom’s CDMA Asia Pacific UBS continues to lead, having our abilities in being able to deliver the
business and network successfully consolidated its position as solutions that you require.
the top ranked investment bank in the
• the acquisition of Korea Express by region. UBS in Asia Pacific is firing on We hope you enjoy this newsletter and
Kumho Industrial; and all cylinders. We would like to thank look forward to receiving your feedback.
our clients for continuing to make the
• Cheung Kong’s acquisition of Vector partnerships between you and us work Robert Rankin
in New Zealand. so comprehensively and recognizing Head of Investment Banking, Asia

Recent Awards Best Investment Bank, Asiamoney, 2007

Best Equity House, Asiamoney 2007
Best M&A House, Asiamoney, 2007
Best Investment Bank in Asia Pacific, Euromoney, 2008

Best M&A House in Philippines, Euromoney, 2008 Best Investment Bank, Finance Asia, 2007
Best Equity House in Philippines, Euromoney, 2008 Best M&A House, Finance Asia, 2007
Best M&A House in Australia, Euromoney, 2008
Best Equity House in Australia, Euromoney, 2008 Best China Deal, Finance Asia, 2007
Best India Deal, Finance Asia, 2007
Best Foreign Investment Bank in China, Best Project Financing Deal – Hong Kong, Finance Asia, 2007
FinanceAsia, 2008
Best Foreign Investment Bank in Philippines, Best M&A Bank – China, Global Finance, 2007
FinanceAsia, 2008 Three Deals of the Year, CFO Asia, 2007


Asia Pacific View August 2008

Key trends in Asia’s financial

institutions sector

“
The financial institutions space in Asia UBS, were able to achieve, suggests the
is in a state of flux as local champions deal could serve as a major catalyst for China and India have
look to entrench themselves further M&A transactions in Hong Kong’s
domestically and regionally in the banking sector. experienced strong
face of further competition from
international banks. In addition, In Indonesia too, there is similar movement
growth on the back
of robust and rapidly

”
changes in legislation across the taking place as the country’s regulatory
region are beginning to take effect
as governments attempt to push
requirements develop. The government’s
Indonesian Banking Architecture policy growing economies.
their overcrowded banking sectors to was introduced in an attempt to reduce
consolidate further. UBS believes this the number of banks in the country from competition amongst Korean financial
is a trend that is set to continue. its present 130 to between 50 and 60. investment companies and trigger sector
In addition, the Single Presence Policy consolidation as players seek to secure
Taiwan’s banking sector has been at the has also been rolled out to prohibit the scale to compete with each other and
forefront of the story. Over the last two ownership of more than one Indonesian their regional peers.
years, four banks have been successfully bank by a single entity. This bank
acquired by foreign and domestic legislation will necessitate further stakes Privatization
institutions. However, with 39 banks still being put up for sale. As well as consolidation, privatizations
in operation, the sector remains highly will be another key theme throughout
fragmented. With the newly elected Conglomerates in the Philippines are Asia for the sector. For example, with
Taiwanese government only too aware making waves in that market’s banking the Taiwanese government holding over
of the situation, market participants and sector as they look to consolidate their 50% of the sector’s assets in eight banks,
observers expect further activity. interests, and the country’s mid-sized the market expects privatization of the
banks are seeking asset expansion and government controlled banks to continue
Following closely on Taiwan’s heels is growth opportunities in an effort to in the medium term.
Hong Kong, which stole the headlines achieve larger scale and better
in June following a decision to put Wing pricing power. In Korea, the privatization of
Lung Bank up for sale. China Merchants government-owned banks such as Korea
Bank was the eventual victor, successfully Further north, all eyes will be on Korea Development Bank, Industrial Bank of
acquiring the bank for USD 4.7 billion. The from 2009. The introduction of the Korea and Woori Financial Group, which
high valuation of 3.11 times book value Capital Markets Consolidation Act the new government has repeatedly
that the selling shareholders, advised by next February is expected to enhance stated as a priority, will significantly


Asia Pacific View August 2008

impact the competitive dynamics and in several M&A transactions in the growth, there is increasing interest in
industry landscape, given the scale of sector. With the consumer credit crisis cross-border M&A transactions within
these institutions. in Taiwan coming to an end, private and beyond Asia. Faced with a mature
equity firms such as The Carlyle Group, banking market and a stable three-
Capital raisings SAC and Longreach have all acted on bank system, Singaporean banks are
The banking sectors of the developing the reasonable valuations on offer and expected to make forays overseas,
economies of the region, in particular taken control of a number of mid- while in China, there will continue to
China and India, have experienced sized banks. be outbound M&A transactions by the
strong growth, on the back of robust well-capitalized “Big 5” banks, in order
and rapidly growing economies. The UBS acted as financial advisor to Ta to enhance diversification, profitability
“Big 5” Chinese banks have collectively Chong Bank on the USD 656 million and growth.
raised USD 45.7 billion from their IPOs sale of a 36.6% stake to the Carlyle
since 2005-2007, while recent capital Group in July 2007. Recent cross-border M&A transactions
raisings by Indian banks of over of the larger Chinese banks have taken
USD 19 billion highlight how India’s In Indonesia, UBS advised TPG Capital various forms, including ICBC’s
banks have increased their capital base on its USD 175 million acquisition of PT USD 5.6 billion acquisition of a 20%
in order to respond to the growing Bank Tabungan Pensiunan Nasional in stake in Standard Bank of South Africa
financial services needs of the Indian June 2007. (October 2007), China Merchant
economy as a whole. Bank’s USD 4.7 billion acquisition of
Rising cross-border interest Wing Lung Bank of Hong Kong (June
Financial buyers With companies looking for greater 2008) and Bank of China’s USD 965
Financial buyers continue to show interest market diversification driven by the million acquisition of Singapore Aircraft
in the region, which has culminated search for greater profitability and Leasing Company (December 2006).

UBS transactions

China Taiwan Philippines

• Financial advisor and bookrunner on • Financial advisor to Ta Chong Bank on • Financial advisor to Philippine National
People’s Insurance Company (Group) the USD 656 million sale of a 36.6% Bank on its USD 608 million acquisition
of China’s USD 1.1 billion lower tier 2 stake to the Carlyle Group (July 2007) of Allied Banking Corporation
bank capital issuance (April 2008) (April 2008)
• Sole bookrunner and sole ratings Korea • Sole bookrunner on Philippine
advisor on Shenzhen Development • Lead manager on disposal of a 7% National Bank’s USD 208 million
Bank’s USD 923 million lower tier 2 stake in Woori Financial Group held follow-on offering (July 2007)
bank capital issuance (March 2008) by the Korea Deposit Insurance
Corporation (December 2007) Singapore
• Joint financial advisor and sponsor on
Huaxia Bank’s USD 1.6 billion private • Joint bookrunner on Industrial Bank • Financial advisor to DBS on its
placement (March 2008) of Korea’s JPY 60 billion Samurai bond acquisition of Bowa Bank with a
offering (November 2007) USD 1.4 billion subsidy from the
• Joint sponsor and bookrunner on
Taiwanese government
China Pacific Insurance (Group)
Indonesia (February 2008)
Company’s USD 4.1 billion A share IPO
(December 2007) • Financial advisor to TPG Capital on
its USD 175 million acquisition of a Thailand
71.6% stake in PT Bank Tabungan • Joint placement agent on Thai Military
Hong Kong
Pensiunan Nasional (June 2007) Bank’s USD 1.1 billion recapitalization
• Financial advisor to the Wu family
(December 2007)
(selling shareholders) and Wing Lung
Bank on the USD 4.7 billion sale to India
• Joint bookrunner of HDFC Bank’s Malaysia
China Merchants Bank (June 2008)
USD 700 million ADS follow-on • Joint bookrunner on Maybank’s
• Joint bookrunner on Wing Hang USD 300 million subordinated Sukuk
offering (July 2007)
Bank’s USD 400 million upper tier 2 offering (April 2007), which was the
bank capital issuance (April 2007) • Joint bookrunner of IDFC’s
world’s first Islamic USD subordinated
USD 520 million Qualified
• Sole bookrunner on Bank of East Asia’s Sukuk bank capital
Institutional Placement (July 2007)
GBP 300 million upper tier 2 bank
capital issuance (March 2007)
• Joint bookrunner on Dah Sing Bank’s
USD 200 million upper tier 2 bank
capital issuance (February 2007)


Asia Pacific View August 2008

Asia’s telecommunications market

Asia’s Telecoms
is coming of age. With the industry
boasting 1.4 billion mobile customers,
but with penetration levels still
below those of Western Europe and
the US, it’s unsurprising that this
combination of scale and potential
growth is attracting so many global
telecommunications operators.
sector in focus
Over the past five years, inbound M&A
volumes have increased dramatically.
According to Thomson Reuters,
announced telecom M&A deal volumes
reached USD 23.7 billion in 2007
compared to USD18.8 billion for the
entire 2003-2006 period as operators
look for regional and local partners and 10.3 billion. With the entity successfully Asia’s players focused on the undersea
targets that will rapidly enhance profiles claiming 40 million mobile subscribing cable sector, where a number of
and create value. With the rewards on customers and a presence in ten markets, undervalued assets were shaken free
offer so attractive very few, it seems, are it is already one of the largest pan-Asian following the bursting of the technology
being deterred by the unpredictable and operators, and the demerger and spin bubble in 2001. Players such as Reliance
less consistent regulatory environments off transaction is attracting a lot of Communications and VSNL from India
they face when entering such attention from international telecom and China Netcom built up significant
diverse markets. operators looking to unlock value in their holdings and a strong presence in
own operations. this area.
India has led the telecoms M&A trend
from the front, with large market In Vietnam too, with its rapidly In the more technically advanced markets
changing deals dominating headlines developing telecoms market, of Japan, Korea, Singapore and Hong
over the past 12 months. Vodafone, international interest has intensified. Kong there is also plenty of M&A activity.
advised by UBS, kicked off proceedings Despite there being a lack of clarity on PCCW in Hong Kong and Starhub in
in October 2005 by taking a USD1.5 timing, VMS Mobifone is being lined up Singapore, to name just two, have been
billion strategic interest in Bharti Airtel. for privatization with several regional at the forefront of the global fixed-mobile
This was followed by its USD11.9 billion and global operators interested in the convergence trend, offering quadruple
acquisition of HTIL’s interests in Hutch potential opportunities on offer. plays that combine mobile and fixed
Essar in February 2007, again advised by telephony, broadband and IP-TV to their
UBS. At the time the deal was announced With the largest mobile phone market customers. The recently announced
it represented Vodafone’s largest ever in the world, developments in China PCCW reorganisation and potential sale
cash acquisition and was also the largest are being closely scrutinized by all. The of a minority stake in the telecom and
transaction ever announced involving an recently announced restructuring of its media business, advised by UBS, suggests
Indian company. telecom industry is one of the largest developed markets in Asia will also
industrial reorganizations ever under generate their fair share of
Vodafone has not been alone in its taken globally. A crucial element of the corporate activity.
increasing level of interest in the restructuring includes China Telecom,
Indian market. Other recent landmark advised by UBS, purchasing China Further examples of Asia’s outbound
deals include: Providence Equity, in Unicom’s CDMA business and network. telecoms M&A activity revolves around
a consortium of financial sponsors, deals into other emerging telecoms
acquiring a minority stake in Idea Cellular; As China’s landscape continues to markets. An example is MTN, which
Telekom Malaysia’s investment in Spice evolve, foreign strategic investors has seen two of India’s leading players,
Communications; and Maxis’ acquisition are increasingly looking to gain Bharti and Reliance, in discussions
of a controlling stake in Aircel. Foreign some exposure to the market. And around a possible tie-up. Not to be
strategic and financial investors are also with potential 3G licenses on offer out done, China Mobile has already
showing a keen interest in greenfield opportunities for international players ventured into Hong Kong and Pakistan
licenses that are coming on offer. to share their expertise with domestic and has expressed interest in a number
operators look increasingly likely. of other targets. Singapore Telecom and
India’s story is being mirrored to some Telekom Malaysia have ventured beyond
degree in South East Asia as landscape But the story is not all about inbound their home markets too and built very
transforming transactions continue to opportunities. Asia’s domestic and attractive pan-Asian portfolios. With top
be executed. In April 2008, Telekom regional champions are quickly lines and bottom lines strengthening,
Malaysia, with UBS acting as its financial establishing themselves and looking Asia’s major operators are not expected
advisor, demerged its international across their borders for their own to be left on the sidelines and will be
mobile subsidiary, TMI Berhad, for USD overseas opportunities. Originally, major players in the consolidation story.


Asia Pacific View August 2008

Indonesian natural resources –

thermal coal heats up
“
With its abundant natural resources natural resources sector including coal.
Indonesia has once again caught Notably, UBS acted as the Sole Global Indonesia is the
the imagination of global investors.
On the back of soaring oil prices, its
Coordinator for the USD 337 million
IPO of ITM in late 2007, where UBS
world’s largest
alternative energy supplies are again was the first international bank to exporter of thermal
in demand as its neighbours clamour act as Lead Managing Underwriter in
for its thermal coal to power cheaper Indonesia. Other significant natural coal. In 2007 Indonesia
coal-fired power plants. resources transactions completed in
2007 include the USD 174 million
accounted for roughly
The price of export thermal coal has accelerated placement of PT 30% of the total supply
risen by more than 125% within the International Nickel Indonesia Tbk
past year and currently trades at (PT INCO) and the USD 105 million of globally traded
USD 142.58/tonne. The bullish sentiment
on Indonesian thermal coal is reflected
senior secured notes offering for
Shining Hope Pte Ltd in its acquisition
thermal coal with
approximately 183

”
by the rising share prices of Indonesia’s of Riau Baraharum coal mining in
companies in this sector. Share prices of
the three largest Indonesian listed coal
Sumatera, Indonesia.
million tonnes.
companies, PT Bumi Resources Tbk., PT Overview of Indonesian
Tambang Batubara Bukit Asam Tbk., thermal coal Indonesia thermal coal
and PT Indo Tambangraya Megah Tbk. utilization mix (2007E)
have increased over 100% each over the According to the Indonesian Mining
past year. As a comparison, the Jakarta Association, around three quarters of Metallurgy Others
Composite Index has decreased by 7% domestic coal is used by local power Pulp 1% 2%
during the same period. plants for electricity generation.
3%
Indonesian thermal coal has less heat
In line with this, corporate activity in the value and more moisture compared to its Cement
coal sector has been on the rise. PT regional counterparts and as a result is 18%
Adaro Energy Tbk successfully raised sold at a discount to the regionally used
USD 1.3 billion following its IPO in July Newcastle price index, thus making it
2008 and PT Indika Energy Tbk raised very attractive for regional power plants.
USD 297 million in early June 2008,
while PT Bayan Resources is looking Indonesia is the world’s largest
to raise between USD 500 million and exporter of thermal coal. In 2007,
USD 700 million with its expected third Indonesia accounted for roughly 30% Power plant
quarter listing. of the total supply of globally traded 76%
thermal coal with approximately 183 Source: Indonesian Mining Association
On the M&A front, there is a significant million tonnes. According to UBS
level of consolidation as power Research, Indonesia’s coal exports are
companies look to secure Indonesian expected to almost double from 103 Indonesia’s top ten thermal coal
coal assets either through equity million tonnes in 2004 to 201 million export destinations (2007)
participation, off-take agreements or tonnes by year-end 2008. Key factors Philippines Others
a combination of both. In June 2007, for this big increase are the country’s Malaysia 3% 8%
4% Japan
India’s Tata Power invested around favorable comparative pricing as well 17%
USD 1.3 billion to acquire a 30% interest as proximity to its regional customer Thailand
5%
in two coal mines owned by Indonesia’s base (North Asia) vis-a-vis other major
Hong Kong
largest coal company, PT Bumi Resources coal producing countries in the region, 6% South Korea
15%
Tbk. In May of this year, India’s Reliance such as Australia. Reflecting growing
Power acquired three Indonesian coal global demand for coal, UBS Research EU-15
7%
mines for USD 1.0 billion. estimates that, average export thermal
coal prices will almost triple from USD China Taiwan
8% 14%
UBS has one of the strongest investment 55.5/tonne in 2007, to USD 160.0/tonne India
13%
banking franchises in Indonesia and has by early 2009.
been extremely active in the Indonesian Source: AME Mineral Economics


Asia Pacific View August 2008

Challenges The only way to invest in coal mining is

by acquiring a local Indonesian entity
Whilst both domestic and regional that already has a coal mining license
demand for Indonesian coal remains or by establishing an Indonesian entity
very strong, supply has not been able which can apply for a coal mining
to catch up with the strong appetite for license. This itself can take many months
Price of export thermal coal (JFY) Indonesian coal. AME projects that coal or even years with many regulatory
exports will grow at a slower pace in the hurdles. There are two types of mining
200
160.0 165.0 short-term. Indonesia has been plagued licenses issued in Indonesia, Mining
160
125.0 with supply bottlenecks due to a lack of Authorization (“KP”), which is restricted
USD/tonne

120
improvement in its rural infrastructure. to entities 100% owned by Indonesian
65.0
80
45.0
53.0 52.5 55.5
Specifically, transportation routes from nationals and Coal Contract of Work
40
the coal mines to the open sea are still (“CCoW”), which can be granted to
0
2004 2005 2006 2007 2008E 2009E 2010E L ong
underdeveloped or non-existent causing foreign entities. The first generation
te rm
transportation delays for customers of CCoW only allows a maximum
Source: UBS Research, March year-end or new coal development projects 49% foreign shareholding. The later
being installed. generation of CCoW can be granted
to foreign entities, but there is still
Foreign entities are not allowed to a requirement to have Indonesian
Global traded thermal coal supply directly own coal mining concessions. nationals as the shareholders.
800 725
697
643 663
Million tonnes

628

Outlook
600 571
544 222 230
209
198 214
162
155 66 69
25 4 63
400 48 59 65
64 56 63 64
54 66 64
50 140
Going forward, demand for thermal coal in Asia is expected to remain strong
73 127 134
64 113 119
200 109
108
221
in the short to medium term. Thermal coal prices are expected to remain
170 183 201 211
103 125
0
2004 2005 2006 2007 2008 2009 2010E
high, reaching USD 165.0/tonne by early 2010. with a long term price of
Indonesia Australia South Africa Columbia China Other
USD 65.0/tonne. Amidst this environment, Indonesia will play an even more
Source: UBS Research, March year-end
important role. We expect more Indonesian coal companies to tap the international
capital markets to secure funding with the aim of solving existing bottlenecks and
expanding their domestic footprint. We also expect Indonesian coal companies
to play a vital role in regional utility companies’ strategy in their quest to vertically
integrate their coal mining operations. We see no end to the current activity and
remain optimistic that this sector will continue to boom in the foreseeable future.


Asia Pacific View August 2008

The growing importance

of Sovereign Wealth Funds
Sovereign Wealth Funds have investments under the guise of private reserves, which now exceed
emerged as an important and equity, hedge funds, and other closed USD 1.5 trillion, the highest anywhere
growing force in the world’s capital investment vehicles as the political noise in the world. Inflation is now at an
markets. Their liquid assets have and popular disquiet about SWFs become 11-year high, close to 7%, and the
swollen as a result of soaring louder. A number of such deals with pressures on the monetary conditions
commodity prices and the ballooning private equity vehicles have already been in China mean that the authorities are
current account surpluses in many of reported in the first quarter of 2008, for increasingly looking at ways to release
the countries where they are based. example Temasek Holdings’ investment money out of the system and put it to
At a time of global financial stress alongside KKR in India’s Bharti Infratel. work overseas. Building inflationary
and with concerns mounting over This change in investment strategy also concerns and runaway domestic money
commodity prices and inflation, the insulates SWFs from domestic criticism, supply growth, with the potential to
role that these funds play could as specific investments become more fuel asset-market bubbles in property
not be more important. opaque to the public and the media. and stock markets, help to explain the
domestic drivers behind the foreign
To put SWFs’ influence into perspective, Emergence of new Asian Sovereign ventures of the newly set-up China
according to Global Insight SWFs Wealth Funds Investment Corporation (CIC), as well as
accounted for 35% of global M&A the more established state-owned banks
activity in 2007 and 28% of total M&A While it remains difficult to gauge the and state-owned companies.
activity in the United States in January total assets under management of
2008. SWFs have overtaken private SWFs, estimates suggest they amount The development of CIC in September
equity buyouts as the leading force in to around USD 3.5 trillion, making them 2007, Asia’s largest SWF, is a major
M&A, with private equity buyouts falling slightly larger than the combined assets accomplishment. It is mandated to
to below USD 3 billion in the fourth of hedge funds (USD 1.5 trillion) and manage over USD 200 billion of central-
quarter of 2007, from USD 15 billion private equity (USD 1.5 trillion); but this bank-supplied foreign exchange for
in the previous quarter. From 2000-07, excludes central bank reserves of an more lucrative investments across a
SWFs made strategic acquisitions and additional USD 4.5 trillion. broader range of global assets. While
disposals of around USD 115 billion taking direct equity stakes itself, such
(based on external disclosures). This does Against this background, Asia’s as its USD 5 billion equity investment
not include foreign investments by state- sovereign wealth continues to expand in Morgan Stanley in December 2007,
controlled corporations (e.g. Dubai Ports), rapidly, averaging 25% AuM growth CIC has also decided to farm out the
which are estimated at an additional per year over the last five years, with management of its funds for tender to
USD 100 billion over the same period. China and Malaysia reporting the worldwide professional fund managers
fastest Sovereign Wealth generation experienced in a broader range of global
Most of the deals involving SWFs centred in the region, at over 40% per year. assets, including those in emerging
around the acquisition or disposal of The sources of Sovereign Wealth are markets, with a view to achieving a
minority stakes in listed or unlisted firms. principally linked to the generation higher risk return.
At a sectoral level, property and financial of current-account surpluses on
institutions dominate the figures. Since the balance of
2006, SWFs have invested around payments, allied
USD 82 billion in financial services, (e.g. with strong foreign
UAE investing in HSBC and Temasek into direct investment
Standard Chartered). (FDI) and portfolio
inflows.
The financial sector will continue to
be a focus area for Asian SWFs as they In China not only
take key minority stakes in the larger is FDI inflow the
U.S. and European banks, including largest, but, more
UBS. With the financial sector under importantly, the
extreme stress, the timing of these swelling trade-
investments is highly opportunistic, both based surplus has
financially and politically. However, SWF been the principal
investment strategies in the first quarter driver to rising
of 2008 have begun to take the form of foreign exchange

10
Asia Pacific View August 2008

Proposals to set up a Japanese SWF to overseas financial assets. India’s foreign- world, creating insightful debate at the
manage part of Japan’s USD 1 trillion exchange reserves are up by 57% on highest level.
foreign exchange reserves have so far last year, despite a trade deficit. There
been less successful with the Ministry is speculation that an Indian SWF could The largest SWFs were represented at the
of Finance’s proposal meeting with initially have capital of USD 5 billion and conference alongside a select handful of
resistance, even from the minister be modelled along the lines of Temasek, countries which have growing reserves.
himself. Nevertheless, draft proposals the long-established Singaporean SWF. Key decision makers, such as Bob
for a Japanese SWF to be set up within Zoellick, President of the World Bank, also
the year will be submitted by the end of UBS and SWFs participated. Covering topics such as Best
March and have the endorsement of the Practices for Sovereign Wealth Funds,
former Japanese prime minister, In recognition of the significance of Asset Allocation and the Implications
Shinzo Abe. SWFs, UBS Investment Bank and Global of Strategic Equity Holdings, the event
Asset Management hosted the inaugural was unique in its SWF-only composition.
Not wishing to be left out, Taiwan’s UBS Sovereign Wealth Fund Conference Keynote speeches covered the themes of
government also took a decision at in Abu Dhabi on 21-23 April 2008. Public Relations Strategy, the Establishment
the end of 2007 to set up a SWF that The event was a natural evolution of of SWFs in Georgia, Private Equity and
will utilise Taiwan’s stock of foreign UBS’s sovereign relationships that are Significant Cross Border Capital Flows.
exchange and other short-term managed in close collaboration between
foreign assets, such as triple-AAA- the two business groups. The conference Within Asia, the UBS Financial Sponsors
rated government Treasury bills. The in Abu Dhabi was attended by 40 senior Team, headed by Stephen Gore, manage
Taiwanese government has confirmed clients from 25 institutions around the the coverage of SWFs for IBD.
that it is finalising details for the creation
of an overseas investment fund financed
by contributions from the public and
Globally, SWF assets are highly concentrated with the top ten funds
private sector. The initial TWD 2 billion
accounting for 80% of total assets. The majority of SWFs derive their
(USD 61.5 million) portfolio will be
income from commodities, the single largest contributor being oil, whilst
managed by the Council for Economic
other large SWFs derive their income from current account surpluses and
Planning and Development, with
growing fiscal reserves.
private capital furnishing around 60%
of total funding and the government
contributing the remainder. Energy No Sovereign Wealth Fund (Country) Funding source AuM (USD bn)
projects in the Arabian Gulf region will
be amongst those specifically targeted. 1 Abu Dhabi Investment Authority (UAE) Oil 650-700

Policy developments are also likely 2 Norway Government Pension Fund (Norway) Oil 350-400
to enhance the expansion and more
3 GIC (Singapore) Fiscal/Reserves 330
aggressive investment role for South
Korea’s only SWF, the Korea Investment
4 Saudi Arabia Monetary Authority (Saudi Arabia) Oil 300
Corporation (KIC). The KIC is in talks
with the national pension service and 5 Kuwait Investment Authority (Kuwait) Oil 250
other pension funds to expand its
investment pool. The Korean Finance 6 China Investment Corporation (China) Fiscal/Reserves 200
Ministry said in November 2007 that
it planned to expand KIC’s assets 7 Temasek Holdings (Singapore) Fiscal 160
tenfold to USD 200 billion by 2015 and
broaden its investment scope, allowing 8 Russia Reserve Fund (Russia) Oil & Gas 150
investment in real estate and private
equity funds. The Bank of Korea has 9 Hong Kong Monetary Authority (Hong Kong) Fiscal/Reserves 140
also relaxed its investment guidelines for
KIC to invest in EM equities and equities 10 Libya Reserve Fund (Libya) Oil 50-100
more generally, away from traditional
Source: Global Insight, UBS estimates
OECD government bonds.

Meanwhile, in mid-February 2008 India

became the very latest country to discuss Growth of Sovereign Wealth Funds
setting up a SWF. Indian policymakers
are currently debating the possibility of According to Global Insight, over the medium term, SWFs are expected to
setting aside a portion of the country’s be the fastest growing institutional investor segment SWF AuM could be
foreign-exchange reserves, standing more than double that of global hedge funds, and about six times the size
at USD 291 billion, to set up a SWF of private equity funds. Cerulli and McKinsey forecast that SWFs will grow
to invest in local infrastructure and at a CAGR of 18% between 2006 and 2012.
overseas energy resources, as well as

11
Asia Pacific View August 2008

“
Projected medium-term growth of different asset classes

40
8%
11
% Asia’s sovereign wealth
GR
35
30 CA
GR5
%
CAG
R CA
continues to expand
rapidly, averaging 25%
USD trillion

25
20
per year over the last

”
15 9% %
18
10 CA
GR
CA
GR
GR
1 5%
GR
12
% five years.
5 CA
CA
0
Pension Mutual fund Insurance Reserves SWFs Hedge funds Private equity

2006 2016

Source: UBS, Cerulli, McKinsey

Differentiating Sovereign Wealth Funds

SWFs are often considered to be a homogenous group Strategic investors are more aggressive in their asset
of investors. In reality, SWFs include a variety of allocation. They make individual acquisitions and
institutions with different goals, investment approaches dispose of strategic assets, operating in a similar fashion
and risk tolerance. From an investment style perspective, to private equity funds. According to UBS estimates,
they are typically distinguished into three fund types they control c. 20% of the assets managed by SWFs,
– stabilisation funds (e.g. HKMA), savings funds (e.g. but their importance is gradually growing. In fact,
Norway Government Pension Fund) and reserve more assets are being shifted from asset managers to
investment corporations (e.g. Russia Reserve Fund). strategic investors. There are several drivers for this.
First, the amount of reserves held in the stabilization
Another useful distinction of SWFs is that between and savings funds is becoming large enough and new
“asset managers” and “strategic investors”. The majority SWFs are being established (in the Middle East, for
of SWFs fall in the category of asset managers. They instance, new SWFs are being established to diversify
have a very similar investment approach to conventional the fast-growing reserves). Secondly, the asset
institutional investors (i.e. pension funds), rarely take allocation of existing funds is being revised, to broaden
individual major stakes in single companies and mostly the spectrum of investments considered in the asset
invest in publicly-listed financial assets (e.g. bonds and allocation. It is the recent activities of these strategic
equities). In general, they are passive and long-term investors which has recently catapulted SWFs into the
investors with no desire to impact company decisions by global spotlight.
actively using their voting rights.

SWFs as strategic investors

SWF investment by destination, 2007-08 (USD bn)

SWF direct/strategic investments 2003-08 (USD bn) 50 44.3

40
30
60 5%
20 12.1
8.8
49.7 10 2.4 1.7 0.9
40
4% 0
US CH UK India Japan Australia
40
3%
SWF investment by sector (USD bn)
30
24.4 70 62.0
2%
18.3 60
20
50
40
1%
10 8.2 30 4.7
5.0 20 2.3
1.1 10 2.1
0 0% 0
03 04 05 06 07 08–Feb Finance Real Estate Retail Telecom

Source: Dealogic

12
Asia Pacific View August 2008

Q&A Key questions on Global Inflation

Paul Donovan , Deputy but it is very unlikely to replace the demand that has been lost in
Head of Global Economic Europe and America.
Research, UBS Investment
Bank, gives his views on the Q. Do you believe that China’s economy will slow down
issue of global inflation and following the Beijing Olympics?
on the likely impact on the
economies of Asia. We do not believe that the Olympics will have a significant
impact on the Chinese economy, in a direct sense. The
Q. How long will this construction and economic activity related to the Olympic
slowdown in the world project is a tiny part of an economy as large as that of China.
economy continue? Can Asia Olympics only tend to have a significant direct impact on
help prevent a slowdown? an economy if the host country is relatively small, and the
construction and tourism therefore forms a large proportion
We believe that the world economy will operate below its trend of GDP.
(potential) rate of growth for all of 2008 and 2009. The world
may start to get back towards trend in 2010, but the recovery is There are indirect impacts from the Olympics. It is possible that
likely to be slower than normal. the Chinese government has been delaying some policy moves
until after the Olympic Games, and those policy changes could
Asia can, of course, contribute positively to the world economic then alter the economy. However, we do not believe this to
recovery when it comes. However, there are problems with the be the case, and there seems to be little impact on fiscal or
idea that Asia will take a strong role. Asia (excluding Japan) is a monetary policy. For the longer term, the way in which China
little more than 20% of the world economy. That is important, presents itself to the world during the Olympic Games can
but it means that the whole of the Asian economy (including be very important to its international image and longer term
China and India) is the same size as either Europe or the United growth. It’s estimated that around 4 billion people watch some
States. While Asian growth is not too export dependent, and part of the Games. A successful Games (Seoul, Sydney) can
domestic demand in the region can do something for the world bring long term investment through good publicity. Conversely,
economy, exports are still an important part of Asian economic an Olympic Games that does not present a country in a positive
activity, and that growth depends on Europe and America. way can damage longer term growth prospects.

More significantly, the causes of this slowdown are rooted in Q. Are we heading into an era of stagflation?
weaker consumer demand in Europe and America. Because
European and American consumers are wealthier than Asian Stagflation has no formal economic definition. Rising inflation
consumers, they tend to purchase different sorts of goods. It and slowing growth is quite common - because inflation tends
is unlikely that Asian consumers will buy the same items that to react to growth with a lag. The 1970s, which are commonly
European and American consumers used to buy. This means that referred to as a stagflationary episode, are unlikely to be
Asia might generate a different sort of demand in the future, repeated. In the 1970s the “Carter Misery Index” (inflation plus

13
Asia Pacific View August 2008

the unemployment rate) was over 20%. Something like that is depend on domestic politics as to when they are lifted. The
very unlikely today. I believe that inflation is likely to come down in economic impact of some of these controls is exaggerated. Limits
most OECD economies over the second part of this year. However, on rice exports, for example, sound dramatic - but less than
for emerging markets, inflation may be more of a problem - 3% of rice is actually traded internationally. Nearly all rice in the
including some economies in the Asian region. world is consumed in the country in which it is grown, so export
limits are not as dramatic as they sound.
Q. When will the global economy recover? What are the
positive signs to look out for? Q. As the global economy slows are you seeing any
protectionist measures being introduced?
We think the world economy will reach a bottom in the third
or fourth quarter of this year. The problem is not how far down Protectionism is a very real threat, and it is already a risk that we
the economy goes, it is more a question of how long the world are facing up to. There are two forms we need to be sensitive to
economy is likely to take to recover. I think evidence of a stronger – current account protectionism – limits on trade – and capital
recovery will come in late 2009. I would look for a “normalisation” account protectionism – limits on the free movement of capital,
of the banking system, and more normal credit lending practices, investment etc. Both are serious risks.
as an important signal.
I believe that the best case scenario will see globalization
Q. The outlook for the price of oil shows many variances. stabilize, measured by international trade as a percentage of
Why are there so many differences and is an energy crisis GDP. This is a very different environment to the last 15 years or
looming? so, when globalization roughly doubled - trade share of world
GDP went from 12% in 1990 to 23% in 2006. Protectionism,
Essentially there is disagreement over what is causing the oil and the failure to advance multilateral free trade, is likely to stop
price increase - supply constraints, demand, refinery capacity, trade expanding any more rapidly. Bilateral trade deals, which
speculation. Most economists agree that speculation has very little can harm globalization because they create barriers to anyone
to do with the oil price, and so views depend on the other factors. who is not part of the exclusive preferential trade agreement,
There are wide differences in estimates of supply and refinery are likely to continue and will prevent trade growth from
capacity in particular, which allow for different price estimates. accelerating.

A short term crisis in energy is possible - at least one that is Q. While the U.S. now suggests it wants a strong dollar,
caused by rising oil prices. However, chronic energy shortages the market continues to show dollar weakness. What is
seem relatively unlikely in the developed economies at least. your outlook for the value of the U.S. dollar?
In the 1970s the world was very dependent on oil for power
generation, and a genuine energy crisis emerged (the United Longer term I think the dollar is declining. Its use as a reserve
Kingdom suffered repeated power cuts, and the debate was of a currency in the private sector is fading. A Japanese company for
three day working week). Technological change, energy efficiency example is more likely to invoice a Korean company in yen today,
and alternative energy sources mean that this sort of power crisis fifteen years ago they would have invoiced in dollars. The current
(directly halting economic activity) is less likely. There is, however, account will continue to be a negative feature for the US dollar
already a crisis of sorts in that consumers are (through price as well. However, we should remember that the currency markets
effects) forced to choose between whether to buy fuel for their car never move in straight lines. Although I believe the dollar will
or whether to buy other things. Of course, some consumers are tend to weaken in the coming years, I think that in the near term
simply changing their behaviour - Americans are driving less this it has overshot its position against the Euro. There is therefore
year than last; Japan has fewer cars this year than last year, for the the prospect of some Euro weakening, and dollar strength, over
first time since 1946. the next few months - before dollar weakness is resumed.

Q. Food price inflation is also an important issue, what is Q. What is your outlook on interest rates?
your outlook for food prices? Will price controls, restrictive
export practices, and the provision of subsidies continue in We believe that interest rates in Europe, America and the UK
certain countries? have further to fall. In emerging markets, it will vary from country
to country, but interest rate increases are to be expected over the
We expect the price of agricultural commodities to remain remainder of this year. Japan and Australia are likely to keep rates
relatively high for this year - though the percentage change is likely unchanged.
to be lower than it was last year. However, we should remember
that not all commodities are seeing increases in price. It is also very Q. Do you think there will be increased cooperation
important to stress that the price consumers pay for food has little between countries in light of the global slow down?
to do with commodity prices. In an OECD economy, only around
20% of the price of food paid for by consumers actually goes on I believe that any future crisis will provoke a coordinated
agricultural commodities. Consumers spend around 80% of their response for example, the coordinated action by central banks to
food budget on processing, packaging, advertising, supermarket provide the financial markets with liquidity. However, I think that
costs etc. coordinated policy moves in the absence of a crisis are less likely.
Governments in Europe, America and Asia are pursuing different
Limits on exports are, generally speaking, a political devise objectives, and it is hard to see how common policy goals would
- there is no economic justification for them. It will therefore be agreed upon.

14
Asia Pacific View August 2008

UBS’s new Global Capital Markets Group

To improve connectivity for clients Following his appointment Steven announced his GCM Asia senior
and to increase the levels of cross leadership team:
product thinking and cooperation,
UBS has brought together its • Sutha Kandiah and Mark Williams
leading equity and debt primary Joint Heads of Asian Equity Capital Markets
and derivatives business groups
• Ranobir Mukherji
to create the Global Capital
Head of Asian Debt Capital Markets
Markets (GCM) Group.
• Ranobir Mukherji and Michel Lee
In Asia, Steven Barg takes overall Joint Heads of Asian Alternative Capital Markets
responsibility for running the GCM
• Michel Lee
business and reports to the new Joint
Head of Asian Structured Products (Equity-linked and Capital securities)
Global Heads of GCM, Roberto Isolani
and Matthew Koder. • Sam Kendall and James Fleming
Joint Heads of Asian Equity Syndicate and Block/Execution
• Fergus Edwards
Head of Debt Syndicate

Key Contacts
Robert Rankin
Head of Investment Banking, Asia
robert.rankin@ubs.com
Tel. +852-2971 6438

Country heads

Henry Cai Jae-Hong Lee Lauro Baja

Chairman & Head of Head of Investment Banking, Head of Investment Banking, Philippines
Investment Banking, China South Korea lauro.baja@ubs.com
henry.cai@ubs.com jae-hong.lee@ubs.com Tel. +63-2784 8818
Tel. +852-2971 6833 Tel. +82-23-7028 782
Product heads
Ju Zhao Jonathan Chang
Head of Investment Banking, Chairman and Head of Matthew Hanning
UBS Securities Investment Banking, Indonesia Head of Mergers & Acqusitions and
ju.zhao@ubssecurities.com jonathan.chang@ubs.com Corporate Finance, Asia Pacific
Tel. +86-105-8328 966 Tel. +62-2125-547 001 matthew.hanning@ubs.com
Tel. +852-2971 8728
Glenn Fok Parvati Banati
Vice Chairman and Head of Investment Joint Head of Investment Banking, Steven Barg
Banking, Hong Kong Singapore and Malaysia Head of Global Capital Markets, Asia
glenn.fok@ubs.com parvati.banati@ubs.com steven.barg@ubs.com
Tel. +852-2971 8925 Tel. +65-6495 5750 Tel. +852-2971 5577

Jerry Guo Sutha Kandiah Steve Bennett

Head of Investment Banking, Taiwan Joint Head of Investment Banking, Head of Leveraged Finance,
jerry.guo@ubs.com Singapore and Malaysia Asia Pacific
Tel. +886-28-7227 917 sutha.kandiah@ubs.com steve.bennett@ubs.com
Tel. +65-6495 4359 Tel. +852-2971 6772
Manisha Girotra
Head of Investment Banking, India Phumchai Kambhato Stephen Gore
manisha.girotra@ubs.com Head of Investment Banking, Thailand Head of Financial Sponsors, Asia
Tel. +91-22-2286 2008 phumchai.kambhato@ubs.com stephen.gore@ubs.com
Tel. +66-261 35795 Tel. +852-2971 6555

15
Key Contacts (continued)
Sector heads

Patrick Loftus-Hills David Chin Mark Ebbinghaus

Joint Head of Asian Industrial Group Joint Head Financial Head of Real Estate,
patrick.loftus-hills@ubs.com Institutions Group, Asia Lodging and Leisure, Asia
Tel. +852-2971 6533 david-cfd.chin@ubs.com mark.ebbinghaus@ubs.com
Tel. +852-2971 8522 Tel +852-2971 8051
Nick Hassall
Joint Head of Asian Industrial Group Steven Sun James Roth
nick.hassall@ubs.com Joint Head of Financial Head of Technology,
Tel. +852-2971 8484 Institutions Group, Asia Media and Telecoms, Asia
steven.sun@ubs.com james.roth@ubs.com
Tel. +852-2971 8781 Tel. +852-2971 6040

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