Q1: What were the issues that caused Chung to obtain external funding? In 2006, Jadelink had sales of a couple of million HK dollars, which increased several times in 2007. In the first two months of 2008, when the sales volume was three times the sales for the same period in 2007, the business broke even. Jadelink realized a lucrative profit, and was expected to have a brighter future.
Chung was confident that no potential competitors could emerge fast enough to threaten Jadelink's business in a few years. Therefore, he wished not only to open 30 to 50 shops in all major cities of China but also to promote the brand internationally, expanding to Taiwan, Singapore and Japan, making Jadelink a leading player in the industry. Chung believed that Jadelink was good enough to survive well in the market with this existing scale. However, if he wanted to push the growth of Jadelink forward, he would have to expand the company within five years, which would require an estimated RMB100 million (about 16 million dollars) investment.
As Jade industry is capital-intensive, there is too much capital being backlogged in the raw jadeite. The production period usually lasts long, which puts a lot of pressure on capital turnover. Besides, the payback period for a Jadelink shop is two years and it requires about six months for a counter in a department store. As a result, though the company has started to make profit, the existing amount of cash flow is not satisfying enough. More stores and years are required to obtain enough funding to implement Chung’s plan for expansion.
If Chung chose to develop at a conservative pace, using the company’s retained earning, he might miss the opportunity to grow with the expanding China market. Also, potential competitors could also emerge. Therefore, Chung decided to obtain external funding from venture capitalists and other forms of private equity.
Q2: Give recommendations for promoting the expansion of...