ARC Capital Holdings Ltd

FUNTALK
Date of Investment: November 2007
Initial Investment Cost: US$90.0 million
Investment Instrument: Common Equity
Shareholding: 18% (1)
Date of Exit: n/a
Exit Type: n/a
Current Value: US$84.7 million (2)
1. On a fully diluted basis after privatisation
2. As at 30 June 2012
Note: A share placement of US$22m was completed in December 2009
upon the successful transfer to NASDAQ, subsequently the company was
privatised in August 2011
Brief Description
• Funtalk is a leading independent retailer of mobile
handsets and related accessories and services, operating
1,116 retail stores across China. In addition, Funtalk
operates a national wholesale business, distributing mobile
handsets to over 12,000 retail outlets. Until August 2011,
Funtalk was listed on NASDAQ and was subsequently
privatized by a consortium of its original investors including
ARCH, Funtalk management and Golden Meditech.
• PAG Capital invested an initial US$150m in August 2011 to
fund the buyout of Funtalk’s public shareholders and the
company’s continued growth. PAG Capital invested an
additional US$100m in December 2011 to further expand
the company’s operations.
Financial Performance
• April 2012 (FYE March 2012)
– YoY Sales: +40%
– YoY EBITDA: -7%
– YoY Net Profit: -9%
Business Update
Quarterly Newsletter Q2 2012
• FY2012 financials exceeded expectations having reported
30% YoY growth in revenue and 26% YoY growth in net
profit. Management accounts for the month of April 2012
reported 40% YoY growth in revenue, exceeding
management’s budget for the month, however gross
margins were lower than expected due to an under-accrual
for carrier-related business income and lower margins from
the sale of mobile devices. This resulted in a 7% and 9%
YoY drop in EBITDA and net profit, respectively, for the
month.
• Despite April 2012’s lower net profit figures, the
management’s budget for FY2013 is still on target
forecasting US$1.8b in revenue and US$65m in net profit,
mainly driven by the opening of new stores and carrier
contract sales growth.
• Store count growth is still expected to double by year end
FY2013, from its current retail store count of 1,116 stores,
mainly focused on carrier-related business service stores.
Opportunistic acquisitions will also be considered.
• Due to ongoing negotiations on the value of Funtalk
shares, there was a delay in settling the US$14.9m
outstanding valuation adjustment balance (US$13.7m
warrant agreements and US$1.2m repayment of a loan to
Funtalk’s management). ARCH will set a deadline for
Funtalk’s management to settle on the valuation
adjustment and will try to complete the transaction as
quickly as possible. ARCH may receive Funtalk shares
and/or cash to settle the valuation adjustment. This
settlement is between ARCH and the personal accounts of
Funtalk’s management and therefore does not affect
Funtalk’s issued share capital or cash position.
• Exit strategy still 2-3 years as either a trade sale or IPO.
Valuation
• Market approach using EV/EBITDA
• A derivative pricing model was applied in June 2012 to
quantify the value of the redemption option of PAG
Capital’s structured securities, should the option be
exercised.
• Decrease in valuation from Q1 2012 mainly due to a drop
in comparables.
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