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Why JPMAM China JV’s buyout price is expensive

Chinese partners are not expected to sell their stakes in mutual fund joint ventures.

Shanghai International Trust (Sitco), which is JP Morgan Asset Management’s partner in its joint venture in China, has officially auctioned off its holdings in the JV, according to a statement from the Shanghai United Assets and Equity Exchange (SUEA).

This will enable JP Morgan AM to buy out the remaining 49% stake of China International Fund Management (CIFM) and own 100% of the company. However, JP Morgan AM would need to pay RMB 7bn ($1.02bn), which is considered to be expensive based on the JV’s valuations.

According to SUAM, Sitco’s 49% stake in CIFM was recently valued at RMB 4.6bn, which means that JP Morgan would have to pay a 52% premium to take full control of the JV.

FSA sought more information from JP Morgan AM, but it declined to comment on the buyout price.

The buyout price is “definitely expensive”, said Ivan Shi, director of data analytics at Z-Ben Advisors. According to his calculations, it brings the JV’s price-to-earnings ratio to 50 times and the price-to-AUM to around 11%.

“Normally, the P/E ratio will not exceed ten times, while the price-to-AUM figure is no more than 4%,” he said.

Shi believes that the buyout price is high as local Chinese partners normally wouldn’t want to sell their stakes and give up ownership of a JV firm.

“This case is rather rare, because normally, very few Chinese partners in joint ventures would want to sell their stakes as the JVs are their only mutual fund business,” he said.

“This scarcity [of Chinese partners selling their stakes] is one of the major reasons for the high premium price,”

Echoing Shi, Charles Lin, who was previously Vanguard’s head of Asia and now vice chairman at CLSA, previously said that local players believe that the fund management business is a “great business”, and thus, foreign firms with joint ventures must convince the management of the partner firms to accept majority ownership.

“I don’t think that most of the local shareholders would give up control in their joint venture,” Lin said.

However, in CIFM’s case, Shanghai Pudong Development Bank, which is the controlling shareholder of Sitco, holds a 51% stake in another mutual fund JV, which is Axa SPDB Investment Partners, Z-Ben’s Shi noted.

“Thus, Sitco is willing to sell its stake [in CIFM],” he said.

Part of the Mark Allen Group.