1) Valuation Part 2) OTHER Questions 2.

a) 3 Strong points of the investment Presence of a strategic investment partner: Pepsi Cola already holds a majority share of 57.5 % China is largely an untapped market and presents limitless growth opportunities Located in the western part of China , where the valuations are not as high as those compared to the similar investments in the Pearl River Delta region 2.b) 3 weak points No voting rights , basically reducing them to the role of a mere spectator Significant risk with the Harbin project not being operational in 2 years time or in the worst case it may not take off Weak enforcement of regulations and absence of impartial judiciary may expose us to losses 2.c) Assume you decide to invest , how would you mitigate the risks Sads Follow a staggered method of payment , following a scheduled payment Specify that any disagreement would be arbitrated in HK or the international Arbitration center in Beijing China Economic Trade and Arbitration Commission at Beijing ( CIETAC) C) FX risk Though there is FX risk involved with the repatriation of the money when we exit the investment but we do not see any major exchange rate risk involved here . Though the RMB faces an upward pressure but given how much China is dependent on an export driven economy , the appreciation would be phased and since the currency is going the appreciate it will work in our favour To hedge our investments we could get into some currency forwards locking in the exchange rate D) Financials In the year 1999 , the JV was making revenues of 168M RMB( 20.2M USD) with a net profit of 5.2 M RMB ( 626 K USD ) In my consideration the key variables in the model are the volume growth and the price growth . One of the reasons of this investment is to tap the nascent cola market in China and specially the locations which are further inland , making the volume growth relatively easy to achieve .

As Chinas beverage market has been fighting price deflation lately, it is imperative that the decline in price stops and start increasing for the venture to make money

E) EXIT STARTEGY 1) Possible exit strategies IPO : It could be possible that we go the IPO route Sell the stake to a different investor Sell the stake to an existing stake holder 2) Single IPO Company With a only one bottling company doing an IPO does not give us too much data to analyze or predict but P/E are generally high for Chinese companies which gives us reason to believe that the IPO market route would be most attractive 3) Refusal to Sell Shares In the event that Pepsi or other shareholders having a right of first refusal can considerably reduce the price which we are willing to pay . Considering that we have no say in the management ( with only 1 voting right ) , restricting our freedom to whom we can sell our shares leaves us with no power to decide our fate 4) PUT OPTION Given that Pepsi has so much a stake in this JV and the upbeat forecasts for the beverage sector in China it is possible that Pepsi would have a PUT Option , so as to sweeten the deal for us . This would be beneficial to us because it saves us from any unprecedented drop in our investment 5) CALL OPTION If Pespi Co happens to demand a CALL option from us that could significantly limit our upside potential and thus reducing the price which we would be paying for the 8.2 % stake F ) OPINION 1)Access to Booming China Consumer Market : This is no brainer that one needs to be present in the worlds fastest and one of the strongest economies . Also with China set to transition from a investment led growth story to a consumption led growth story , making presence in the consumer goods sector a viable option. The only question which we need to weigh is that are there other industries ,which are more attractive.

2) Pepsi Name and Brand Recognition : The presence of Pepsi as strategic investor gives us assurance w.r.t the management and operational excellence of the JV. One downside which we see is a strain in US China relation could generate adverse reactions against Pepsi in China. 3) Experienced Management: The profit in the last two years gives us considerable confidence in the viability of the JV. The experience acquired in setting up the Changchun plan will be valuable when they try to set shop in Harbin 4) Scarcity Factor: This JV is particularly interesting because not only does it have the presence of Pepsi as a strategic investor but is also has the presence of China Ministry of light industry . Additionally, unlike other regions, Pepsi is beating Coke hands down in this market . 5) Limited Downside: Considering that we view this investment as providing growth capital rather than implementing significant strategic changes . This is more of a growth deal and a non control investment style