Zhao Linghuan, CEO of Hony Capital, said that other than in a few sectors of State monopoly and defense, State-owned companies are expected to be more market-oriented and to prove their efficiency through competition with other companies, both domestic and overseas. [Photo/Provided to China Daily]

Few people compare doing business with reading a book. But Zhao Linghuan does. The 50-year-old chief executive officer of Hony Capital said conducting private equity investment in China is just like that.

In the beginning you read a book introduced from the West and take down the main points one by one. But you keep adding the points when you go back to your daily work. Eventually, you have collected enough points to integrate them into your own book - on PE investment operations in China, he said.

Hony is Zhao's own book on China operations. It has now grown into a manager of seven funds, looking after a total of more than $6.8 billion in assets, in industries ranging from engineering equipment, pharmaceutics, retail, energy conservation to environment protection and culture.

The company was launched in 2003 by Legend Holdings, a Chinese investment house in IT, investment and real estate formed by the Chinese Academy of Sciences.

It has signed up limited partners including China's National Council for Social Security Fund, China Life Insurance Co, Goldman Sachs and Temasek Holdings.

What is unique about Zhao's book is the expertise in generating new market value in State-owned enterprises. In fact, half of the 70-plus investment deals it has made are State-owned enterprises. "Back in 2003 and 2004, most other PE and venture capital firms tended to shun the old, if not debt-ridden, SOEs and to work with privately owned companies," Zhao said.

That was the time when Hony Capital started to pay attention to SOE reform, Zhao said, "because some of them were really eager to make changes and reform themselves. And we thought change was doable because many of them took up lots of resources.

"They had been shielded from competition for so long that they weren't quite sure about how to compete in the market," Zhao said. But they would learn and learn quickly because they were given some help.

Key SOE deals were Zoomlion Heavy Industry Science & Technology Development Co, China International Marine Containers (Group) Ltd and CSPC Pharmaceutical Group Ltd.

Zoomlion was founded in 1992 by seven staff members from the former Changsha Construction Machinery Research Institute. It was listed on the Shenzhen Stock Exchange in 2000.

In 2005, problems arose over the proportion of State-owned equity being too large, becoming a hindrance to the company's attempted business expansion at home and abroad.

Hony Capital offered to play a role in the restructuring of the company, to take over part of the equity from the old majority shareholder. After the company's restructuring, State-sector shareholders retained 25.95 percent of Zoomlion's shares. Hony Capital and its partners owned 14.5 percent by investing 322 million yuan ($52.1 million), of which 222 million yuan was paid by Hony Capital itself.

The management team owned another 12.56 percent. China Economic Weekly quoted an agreement between Zoomlion and Hony Capital in 2006 and an announcement on logoff approval of Changsha Construction Machinery Research Institute in 2008. The rest of the shares are publicly owned.