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Evaluate Maple’s State of Readiness to Undertake the China Project in Terms of Its Grasp of the Political, Regulatory, Legal, Economic and Financial Considerations with Which It Had to Deal

Essay by   •  November 25, 2018  •  Case Study  •  4,158 Words (17 Pages)  •  173 Views

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1. Situation Analysis – evaluate Maple’s state of readiness to undertake the china project in terms of its grasp of the political, regulatory, legal, economic and financial considerations with which it had to deal.

The trend indicated that project finance was still a preferable approach in Asia when it comes to the resource-based industries like mining and infrastructure such as telecom networks, water, railway, and electricity. Maple still had to evaluate different considerations regarding financial requirements, politics, and regulations in China. Maple required that Tianjin needs to meet following basic requirements. First, the project needed to be separated from its investors to protect the assets of quirky investors and to provide a controlled platform which can evaluate the risks. Second, the project needed to be separable and large in proportion, and the project’s business line has to be singular. Third, there must be cash flow predictability from third parties. Lastly, the project needed to have its life cycle by having a finite life. Pat Johnson believed that Tianjin did meet all four requirements.

Politically, Tianjin was an important industrial and port city under the direct administration of the Chinese government. Being a city under the direct administration, it had more openness towards foreign investment which brought favors to Maple. The construction of the project would take four years, and the economic life would end in 2020. The project is predicted to have an operating margin of 178,000,000 RMB in 2002 with an annual growth rate of 3%. Maple’s project was to be tax-free for its first six years, and Maple will need to pay a tax rate of 40% after six years. The Chinese government also required 25% of annual depreciation of 98,000,000  RMB to be reinvested in operations. Maple would have 49% of the joint venture, and Maple generally preferred this kind of structure because the company can maintain control of operations. Its local partner can provide local participation to the company.

Maple believed that the market potential was huge because China was a promising market opportunity, but the company needed to have a higher hurdle rate than 15% due to the risks posed by the Chinese market. Bank financing from local banks, foreign banks, and lending institutions was the primary source of their capitalization. Another factor that Maple needed to consider was the Chinese currency. The Chinese currency could not be freely converted without going through the government. Although there was a reduction in restrictions, Maple would still have to submit documentation evidence for currency transactions.

2.         Joint Venture Analysis – consider the appropriateness of the joint venture partnership from the perspectives of Maple and Tianjin. What did each bring to the venture in terms of business capability, market potential, relationships, management capability, financial resources and commitment and other key factors. What were the strengths and weaknesses of the venture and how did these characteristics impact the financial issues which were addresses?

Tianjin is a famous industrial and port city in northern China. Since the economic development in 1984, Tianjin's 9.2 million residents have enjoyed the benefits of introducing foreign capital and opening up the economy, which means, the development of Tianjin is likely to drive China's northern economy and is a very objective market.  The financing is comprised of Maple Energy and Tianjin Plastic, a developer of power plant projects. Since 1989, Maple Energy had established several power plants in the United Kingdom in Argentina, Costa Rica and the Dominican Republic, Maple had excellent ability to operate and expand its market. Financing can achieve mutual benefit and substantial returns. Tianjin is a well-developable market, although the demand for the funding in companies in Asia has not changed much. To be successful, the project must be long-term, in the form of an independent legal entity, independent of finance, and scaled to be proportional to the financing of its owners, so that some risks can be circumvented and there is no need for multinational companies to have complex decision-making process. At the same time, a cash flow forecast is essential, so that the return is predictable, giving the company an affordable end period to pay off all bank liabilities.

Strengths:

1. The contract date was started after the construction and testing of the power plant, so there is no such thing as economic life. The project would expect to realize the total cash income from 2000 and end the project in 2020. Enterprises will face a 40% tax rate after income starts to make money, and the Chinese government will start “reinvestment” into operations, and reinvestment will be 25% annual depreciation expense.

2. Maple holding the controlling interests and maintain actual control of operations

Weaknesses:

  1. The environment is also a major factor. The Ex-Im Bank’s refusal to participate was based on the environmental repercussions of the dam, which would flood the historic Three Gorges Region of central China. Even if Maple borrowed money successfully, it would have a relatively high-interest rate to satisfy the analysis of the Chinese market as expected.
  2. China’s macroeconomic environment was substantial and sustainable, but this is not entirely suitable for Maple’s situation, so Maple would face many difficulties and take on more risks, such as currency issues.                                                                 
  3. The Chinese government was attempting to limit the return on investment (ROI) on projects of this type to 12%. After most power plant developers like Maple balked at such low rates of return, the Chinese government revised the target ROI to between 15% and 17% if the plant demonstrated outstanding efficiency. Many analysts still considered that to be low.                                        

The Chinese government did not allow registered capital, the equity capital initially invested under the agreements of the project, to be repatriated. This meant that Maple would not be able to return to the parent company anything other than the profits, the dividends, which might or might not in actuality arise over the life of the project. There would be no repayment of equity participation.

3.         Country Analysis – review the principal governmental requirements, limitations and advantages for an investor entering China. Evaluate the depth of difficulties and the motivations an investor such as Maple needed to encourage its exacting efforts.

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