Geelie Case Analysis

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Dear Mr. Li,
Given the recent objective of Geeli becoming the world’s biggest air-conditioner manufacture within the next five years for which Geeli needs to raise $400 million (RMB 3.35 billion), I have looked into these areas based on the information available: 1.Current Company Position

2.Current Industry Position
3.Financing options
Current Company Position
Geeli has gained substantial market share of this industry under your leadership over the last decade. With Geeli’s present book assets approaching $400 million Geeli has enjoyed a steady growth in it’s revenue and stable cash flows. Additionally, the Geeli brand is valued at $350 million by the State Finance Bureau of China. Given this brand recognition along with the quality of Geeli’s products and service and keeping in line with the company’s objective along with China’s growing economy it is indeed the right time to dominate the air-conditioning industry and further invest in homeland (China) operations. Current Industry Position

The export and domestic demand of the industry has stabilized after several years of rapid growth. This has reduced profit margins and manufactures are now competing on cost driving and profit margins which are down to 5% to 10%. This has also led to several consolidations and exits by smaller players given the number of brands have decreased from 150 in 2003 to 96 in 2004 and 69 in 2005. Price cuts from stronger players have further driven out weaker players and are generally leaving this sector. This works in Geeli’s favor as we are here to stay and expand by reducing our competition, while keeping our core values. Financing Options

Equity Choices
Chinese Domestic Market
Hong Kong Stock Exchange
American Deposit Receipts
Private PlacementsDebt Choices
Domestic Banks
Corporate Bonds
Foreign Banks
Equity Share in Chinese Market
Types of SharesClass A Shares
Class B Shares
Class H Shares
IssuesNon Tradable Shares
Quota system: scale of company chosen by government
Poor corporate governance
ScenarioLow expected rate of return because of limited investment opportunity in China Market highly volatile and prone to market manipulation
Attempts of reform being exercised
RiskRisk of permission of listing
No adequate purchase of shares
Less interest of investors

Requirements to be listed:
CriteriaChinese Stock MarketHong Kong Stock Exchange Geeli (2004) Stockholders’ EquityUS$ 6MUS$ 12MUS$ 247.9M
AssetsNoneNet Assets > US$ 50MUS$ 359.3M
Income from Continuing OperationsNoneLast Years Profit Tax cannot be lower than US$ 7MUS$ 95.6M Publicly Held SharesNone
Market value of publicly held sharesNone
Operating History3 Years11 Years (since 1994)
Profitability3 years cumulative US$ 6M (last yr. US43M; former 2yrs combined US$4M)US$ 48M (2003) US$ 62.1M (2004)

Hong Kong Market in Comparison to the Chinese Market:
AdvantagesSet Backs
-Legal and Regulatory framework
-Free Flow of Capital and Information
-Critical mass of professional and service providers with international standard practice -Broad investor base and international visibility
-High volume of Chinese companies stock trading compared to US and UK stock markets -Closer proximity to culture, language and operations-Listings are more expensive than in US stock exchange -Valuations can be lesser than the comparing US market

Equity Share in US Market (NYSE and NASDAQ)
CriteriaNYSENASDAQGeeli (2004)
Stockholders’ EquityUS$ 15MUS$ 247.9M
AssetsNet Tangible Assets of US$ 40MNoneUS$ 359.3M
Income from Continuing OperationsMost recent fiscal year >= US$ 4.5MLast fiscal year >= US$ 1MUS$ 95.6M Publicly Held Shares1.1 Million1.1 MillionNone
Market value of publicly held sharesUS$ 9MUS$ 8MNone
Shareholders2000 holders of 100 shares or more400
Operating History3 YearsNone11 Years
Profitability3 YearsNoneUS$ 48M (2003)
US$ 62.1M...
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