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Skillschina-lbo-model

china-lbo-model

Agents & models

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Updated 10-15 23:43

About this skill

china-lbo-model

Purpose

Build institutional-quality LBO models for transactions in the China market, accounting for:

  • Chinese debt market structures (bank loans, corporate bonds, medium-term notes)
  • CAS accounting standards
  • A-share trading restrictions and considerations
  • China-specific tax treatment

Key Differences from US LBO Models

Parameter US LBO China LBO
Debt market Public bonds, institutional loans Bank syndicated loans, corporate bonds, ABS
Typical leverage 5-7x EBITDA 3-5x EBITDA (bank-driven)
High-yield market Developed Limited (mostly onshore/offshore high-yield bonds)
Covenant package Bond covenants, bank covenants Primarily bank-led covenants
Management roll Standard Often management equity + earn-out
Tax rate 21% federal 25% standard (high-tech enterprise 15%)
Currency USD CNY (renminbi)
Accounting US GAAP / IFRS CAS (Accounting Standards for Business Enterprises)

Data Sources

Primary: iFind MCP (Tier-1 paid) / AkShare MCP (Tier-2 free alternative)

get_financials(ticker, "income", "annual")   → 利润表 (EBIT, Net Income)
get_financials(ticker, "balance", "annual")  → 资产负债表 (Debt, Cash)
get_financials(ticker, "cashflow", "annual") → 现金流量表 (FCF, CapEx)
get_quote(ticker)                            → Current valuation
get_historical_data(ticker)                  → Trading history
get_stock_info(ticker)                       → Company profile

Secondary Sources

  • Cninfo — public filings for historicals
  • Company announcements — debt agreements, covenant packages
  • National Association of Financial Market Institutional Investors — bond issuance data
  • Wind / Hithink RoyalFlush — comparable transaction multiples

Workflow

Step 1: Company & Transaction Setup

Transaction Structure (China-specific):

  • Buyer type: strategic investor vs financial sponsor
  • ** Listed status**: A-share delisting process vs reverse merger
  • Deal structure: equity acquisition vs asset acquisition vs statutory merger
  • Lock-up: lock-up period considerations (typically 12-36 months)

Entry Valuation:

  • Current market cap (free-float market cap or total market cap)
  • Control premium benchmark: 20-40% typical for China M&A (vs 20-30% US)
  • Take-private premium for A-share delistings: 30-50%

Step 2: Sources & Uses

Sources:

  • Senior debt (bank borrowings): 40-60% of total consideration
  • Subordinated debt / mezzanine financing: 5-15%
  • Equity ( sponsor equity ): 30-50%
  • Revolver (revolving facility): 10-20% of EBITDA
  • Seller note / seller installment payments: common in China

Uses:

  • Purchase equity
  • Refinance existing debt
  • Transaction fees (typically higher in China: 2-4%)
  • Stamp tax: 0.05% on equity transfer
  • VAT on asset deals: 6% (general taxpayer) or 3% (small-scale taxpayer)

China-specific cost items:

  • Stamp tax: 0.05% of deal value for equity transfers
  • Deed tax: 3-5% for asset acquisitions
  • Land appreciation tax: for real estate assets
  • Advisory fees: typically 1.5-3% for IB, legal, accounting

Step 3: Operating Model

Build 5-year projections following standard LBO methodology:

Revenue assumptions:

  • Historical growth rate baseline
  • Synergy adjustments (cost savings, revenue uplift)
  • China-specific factors:
    • capacity utilization trends
    • new capacity ramp
    • market share dynamics

Margin assumptions:

  • Gross margin: track gross margin
  • Operating margin: operating profit margin
  • Note: Chinese industrial companies often have thinner margins than Western peers

Working capital:

  • Accounts receivable (AR) days — often elevated in China
  • Inventory days — FIFO only (no LIFO under CAS)
  • Accounts payable (AP) days
  • Net working capital as % of revenue change

CapEx:

  • Capital expenditure intensity (Chinese industrials often capex-heavy)
  • Maintenance vs growth CapEx split

Step 4: Debt Schedule

China-specific debt structures:

  1. Senior secured bank loan (bank borrowings)

    • Typically 3-5 year tenor
    • SOFR/LPR + spread (1-3%)
    • Covenants: debt-to-asset ratio, interest coverage multiple, current ratio
    • Amortization: typically 1-3% per year (bullet maturity)

  2. Subordinated debt / mezzanine financing

    • Mezzanine structures gaining market share
    • 10-15% coupon typical
    • Often includes equity kicker (warrants)

  3. High-yield bonds / high-yield bonds

    • Limited market, mostly offshore
    • 7-12% coupon range
    • 3-5 year maturity

  4. Revolver (revolving loan)

    • Based on accounts receivable or inventory collateral
    • LTV: 50-70% of eligible collateral

Interest calculation:

  • Average debt balance method or daily balance
  • LIBOR/SOFR replaced with LPR for onshore RMB loans
  • Add credit spread based on company rating

Step 5: Returns Analysis

IRR calculation (same methodology as US LBO):

  • Sponsor equity contributions
  • Dividend recapitalizations
  • Exit proceeds

MOIC calculation:

  • Total cash returned / Total cash invested

Exit multiples:

  • Comparable to china-comps analysis
  • Typical EV/EBITDA exit: 6-12x for China industrials
  • IPO exit: increasingly common (A-share IPO for delisted targets)

Sensitivity tables:

  • Entry multiple vs exit multiple
  • EBITDA growth vs leverage level
  • IRR vs MOIC matrix

Step 6: Scenario Analysis

Bear case:

  • Revenue growth below plan
  • Margin compression
  • Higher borrowing costs
  • Covenant tightness

Base case:

  • Plan assumptions achieved
  • Standard amortization schedule
  • Target exit in year 4-5

Bull case:

  • Revenue synergies materialize
  • Margin expansion through economies of scale
  • Lower financing costs
  • IPO exit at premium

China-Specific Considerations

A-Share Delisting / privatization

  • General offer required for >30% stake
  • Minimum offer price: typically 6 months highest trading price
  • Post-delisting: 3 years before re-listing (ChiNext/STAR Market: 2 years)
  • Repurchase price must meet regulatory minimums

Regulatory Approvals

  • Antitrust review (SAMR merger control)
  • Concentration of undertakings filing for deals above thresholds
  • Foreign investment review
  • Sector-specific approvals

Tax Considerations

  • Capital gains tax: not separately levied on individuals
  • Corporate: 25% (or 15% for high-tech enterprises)
  • Withholding tax on dividends to foreign investors: 10% ( treaty relief possible)
  • Transfer income tax on asset transfers: 25% corporate or 20% individual

Working Capital Norms

  • Chinese companies often have:
    • Higher AR days (less efficient collections)
    • Higher inventory days (especially manufacturing)
    • Higher AP days (supplier financing)
  • Net WC often runs 5-15% of revenue for industrials

Debt Market Access

  • Investment-grade: 3-5% borrowing cost
  • High-yield: 8-15% (offshore bonds)
  • Bank loans: LPR + 100-300 bps
  • Shadow banking restrictions affect trust financing availability

Excel Model Structure

Sheet Architecture

  1. Sources & Uses — deal structure
  2. Operating Model — 5-year projections
  3. Debt Schedule — all tranches with amortization
  4. Returns Summary — IRR, MOIC, equity bridge
  5. Sensitivity — entry/exit multiple sensitivity

Key Formulas

// EBITDA
=Gross Profit + D&A - S&M - G&A

// Unlevered FCF
=NOPAT + D&A - CapEx - ΔNWC

// Levered FCF
=Unlevered FCF - Interest - Mandatory Amortization - Dividends

// Debt at end of year
=Beginning Debt + New Draws - Mandatory Amort - Optional Prepayment

// Interest expense
=Average Debt × Interest Rate

// IRR
=IRR(Equity contributions, dividends, exit proceeds)

// MOIC
=Exit Equity Value / Total Equity Invested

Output Checklist

Before delivering:

  • Sources & Uses balance (Total Sources = Total Uses)
  • Debt schedule amortizes correctly
  • Interest calculated on average or period-end debt (consistent)
  • All hardcoded inputs sourced and commented
  • IRR and MOIC calculations verified
  • Sensitivity tables fully populated
  • Scenario analysis included (Bear/Base/Bull)
  • China-specific taxes/fees included in Uses
  • CAS conventions documented
  • File named: [Ticker]_LBO_Model_[Date].xlsx

Reference

This skill extends the base lbo-model skill. For Excel formatting standards, formula conventions, and section checkpoint methodology, refer to:

  • lbo-model/SKILL.md — base LBO methodology
  • xlsx-author/SKILL.md — Excel file creation standards
  • audit-xls/SKILL.md — model validation and audit procedures

Data Source Mode Switch: Set env var IFIND_DATA_SOURCE_MODE to control data source preference.

  • ifind-only (strict): Use iFind only, error if unavailable
  • ifind-fallback (default): iFind preferred, fallback to AkShare
  • akshare-only: Skip iFind, use AkShare only