Case

ASIAN CASE RESEARCH JOURNAL, VOL.
18, ISSUE 2, 221–249 (2014)
ACRJ
by XLRI SCHOOL OF BUSINESS & HUMAN RESOURCES on 10/18/19. Re-use and distribution is strictly not permitted, except for Open Access articles.
Melville Corporate Finance, Inc.

This case was prepared by
Andrew Ray Lanney of the
Canadian International De
velopment Agency, Gatineau,
Asian Case Res. J. 2014.18:221-249. Downloaded from www.worldscientific.com
Québec, Angeline Pacione of

Export Development Canada,
INTRODUCTION
Santiago, Chile, and Prescott
C. Ensign of the Schlegel
Centre for Entrepreneurship, 12 September 2008, 3:58 pm, Melville Corporate Finance, Inc., Vancouver
Wilfrid Laurier University Office
for use as instructional mate
rial for course assignments Just 72 hours after returning from a week’s holiday, Chris
and class discussion. It is not
the purpose of this material Haselbach was about to join a 4:00 pm progress briefing on
to serve as an illustration of
how to effectively or ineffec the new financing deal in China. Chris was CEO and founder
tively address a managerial of Melville Corporate Finance, Inc. (Melville). The US$3.4
situation. Some information
may be altered to protect con million deal had gotten off to a quick start two weeks earlier.
fidentiality. The development A financing request had come in from an existing client,
of this case was sponsored by
Export Development Canada. Kohen Manufacturing (KM) in Edmonton, Alberta. During
the holiday with his family, Chris had used his BlackBerry
Please address all correspond
ence to Professor Prescott to gather requirements from the KM sales lead, James Chui,
C. Ensign, School of Busi and relay that information back to Nathaniel Shaw, Senior
ness and Economics, Wilfrid
Laurier University, Waterloo, Vice President in Melville’s Vancouver, British Columbia
Ontario, Canada. E-mail:
ensign@wlu.ca.
office. Nathaniel’s coordination with the Vancouver office
and the existing rapport between KM and Melville fast-
tracked the preparations. Yet, Chris wondered if it was rea-
sonable to expect the deal to materialize. He knew that he
could not pursue this further without a full agreement from
Export Development Canada (EDC). The deal could not
proceed unless an EDC Account Manager in Ottawa, Ontario
endorsed the deal. EDC would provide a loan guarantee for
85% of the loan value if they all came to the same conclusion.
The EDC Account Manager had been great in the past and
EDC’s knowledge and expertise complemented that of Mel-
ville’s team. Together they were good at rapidly and properly
evaluating risks.
© 2014 by the authors DOI: 10.1142/S0218927514500096

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License. Further distribution of this work is permitted, provided the original work
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222 ACRJ
Melville had financed previous KM deals and was

accustomed to the time pressures of multi-million dollar,
multi-year, international financing deals. Mr. Chui revealed
that another manufacturer — one of KM’s competitors —

would be sought if the financing could not be in place by
15 October 2008. Mr. Chui confided that a quarterly bonus
hinged on this deal closing by 31 September 2008. Chris
enjoyed a challenge.
ABOUT THE DEAL

On 1 September 2008, KM finalized the technical specifica-

tions for the sale of two large-scale preform production bot-
tling systems. The machine created plastic soft drink bottles;
essentially taking a PET (polyethylene terephthalate) preform
starter through an injection molding system to produce a
beverage container. The preform looked like a rigid deflated
balloon, where the open end already had the threads for the
bottle cap. The purchaser was, Bottle King Zhongshan (BK),
a bottler in Zhongshan, China (see Figure 1). BK had existing
contracts with PepsiCo Inc. and The Coca-Cola Company
for regional bottling operations. BK was facing an ongoing
cash flow crunch as a result of rapid year-to-year growth
Fig. 1. Relationships among participants
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MELVILLE CORPORATE FINANCE, INC. 223
(accounting reports estimated growth at 90% over the three

previous years). As well, the contract renewal process with
Pepsi was scheduled to begin in 18 months; renewal would
be contingent on a satisfactory inspection of operations.

BK’s continued operations and growth depended on
purchasing modern plastic preform production bottling tech-
nology. Through improved automation, higher quality con-
trols, and a greater operational capacity to meet demand,
BK management was pleased the KM sales team was able to
match their requirements with the right equipment. The new
equipment from KM would increase production capacity by
25%. This was sufficient to meet growth projections for the

next three years. Unfortunately, the company’s on-hand cash
supply could not cover this purchase cost. Until now the
natural second option to finance the purchase of the equip-
ment would be mainland Chinese banks. However, BK was
a family-owned business with 100 percent equity owned by
Chinese citizens. Regulations restricted Chinese bank par-
ticipation in international financing deals for any company
without partial foreign ownership. Even if financing were
obtained it would not be US or Canadian dollars. It was
nearly impossible for a private Chinese enterprise to obtain
foreign currency. Other financing options in China were
explored, but without success. An alternative financing option
needed to be found quickly.
On 6 September 2008, KM’s sales team took the lead
to identify financing in Canada and sought help from Mel-
ville, their proven partner for export financing. Using Mel-
ville provided several advantages. First and foremost was
Melville’s ability to quickly step in, assess merit and close
the deal. If EDC’s and Melville’s requirements were met,
financing would be made available immediately and the
equipment would be shipped to Zhongshan within two
weeks of approval. This deal, however, had a number of
unusual characteristics that needed to be explored. This pro-
posed deal did not look like previous deals.
Melville provided another advantage for KM in that
their approval would simplify the deal. If approved, KM
would be paid in full and have no further transactions with
BK on this sale. Melville would assume full responsibility to
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recover the loan from BK directly. In other words, Mr. Chui

and the KM sales team would earn their quarterly bonus
without any strings attached and could move their energies
onto the next sale. KM did not know or appreciate EDC’s role
in the outcome. All KM knew was that Melville somehow
made things happen. The truth was that EDC did a lot of the
work to pull the deal together. As usual, the EDC Account
Manager and EDC team would have to be convinced of the
merits of this particular transaction before providing a guar-
antee. Critical analysis of risks and mitigants would be per-
formed by EDC and Melville.
It was up to EDC and Melville to assess the viability

and decide. On the surface the Zhongshan deal needed to
be considered carefully due to the rapidly changing global
economy. Apart from the financials — which required the
usual scrutiny — this deal was directly with a Chinese
private company. There would be no guarantee by the Gov-
ernment of China or reputable Chinese bank as the inter-
mediary. The rewards from this deal would be significant
for Melville and would include: a strengthened relationship
with KM, an opportunity to gain expertise inside a rapidly
growing market, and financial yield. While Melville’s reputa-
tion was built on its agility and speed to close the deal, this
has never equated with hasty decisions. EDC also knew that
no reward was completely divorced from risk.
Melville had plenty of ongoing projects in Latin
America and there were numerous financing arrangements
to be explored. There were even those at EDC that thought
prospecting in Latin America was easier. Spanish was the
most common language to be overheard at Melville offices
and despite Chris Haselbach’s affinity for China, just one-fifth
of their deals were linked to mainland China. Turning down
a deal that might have been lucrative was not nearly as det-
rimental as approving a deal that should have been turned
down. Knowing when to pass up a deal was an important
part of the business. Something else would always come
along if EDC and Melville chose to pass on this one. Neither
Chris nor the EDC Account Manager wanted to be swayed
by BK choosing not to go with KM if this deal could not be
resolved in time.
01_S0218927514500096.indd 224 29/1/2015 9:22:17 AM

BUILDING THE NECESSARY DECISION CRITERIA
Meeting with Nathaniel Shaw

12 September 2008, 4:00 pm, Melville’s Executive Boardroom, Vancouver

Chris walked into the boardroom to find Nathaniel ready and
waiting. Nathaniel looked up to greet Chris, and indicated
that this deal would be the first of its kind in China for Mel-
ville and apparently, it would be the first EDC deal in this
part of China in this industry. Without Chinese government
authorities or a trusted local bank working with them, they
were on their own dealing directly with a private Chinese
company.
Nathaniel informed Chris that Melville had shared with
EDC what his team had compiled so far. It had only been
a week, but the file was not nearly complete. At this point
the proposal was missing some fundamental information.
Nathaniel pointed out that with what they had right now
Melville would likely not approve a domestic company for
this amount. And given EDC’s high standards for new situ-
ations, the Account Manager would need some convincing as
well.
This deal represented a significant use of capital by
Melville and it was crucial to ascertain that this capital was
being applied very cautiously and risks of losses would be
minimized as much as possible. Melville had a 15% uncov-
ered risk on this deal. Documentation and information had to
be complete.
Company documents from BK were quite revealing. BK
was not nearly as large as Chris and Nathaniel had expected,
particularly considering the size of the loan for which James
was lobbying. Based on this financial snapshot document that
arrived from Zhongshan, China through James Chui, BK was
requesting a loan that was close to one-third of their annual
revenues. Nathaniel knew that if this did not stop the process
it should at least merit serious consideration of the financing
terms. Nathaniel paused and passed the annual revenues
snapshot to Chris (see Table 1).
Chris scanned over the report. Chris reviewed the
document again. He questioned James Chui’s judgment and
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Table 1. Bottle King Zhongshan Annual Revenues

Source: Company financial statements as at September 2008.
wondered if he was misinterpreting what he was seeing. Mel-

ville would not normally follow through on such a dispropor-
tionate financial request.
Nathaniel also recognized that something was missing.
James called that morning and pointed out that this could be
the first of many sales to BK. James highlighted BK’s rate of
growth and the stability of their multi-year bottling contracts
with Pepsi and Coca-Cola.
KM’s position was understood but neither Chris nor
Nathaniel could envision approving a deal based on the
facts at hand. On paper the numbers looked strange consid-
ering the size of the financing BK was requesting. Also, Bottle
King Zhongshan’s income statement indicated that they were
running a high debt to equity ratio. Melville would need to
be able to have influence over how BK managed future cash
flow. At a minimum, if Melville were to proceed, it would
need BK to maintain a specific debt to equity ratio. Further,
EDC had discovered that placing an enforceable lien on the
equipment might be possible.
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Nathaniel would have Melville’s legal advisor include

a reasonable debt-to-equity ratio into the ‘letter of intent’ and
explore the right to place a lien on the equipment as well.
Chris would then send that draft letter over to BK to commu-

nicate Melville’s expectations during the repayment period.
BK’s response to this control might allow Melville to gauge
BK’s intent to pay.
Nathaniel confirmed that he would push James for
confirmation on the revenue levels and ensure Melville’s
legal advisor got updates and forwarded the revised letter of
intent. BK would see it in a couple of days. BK seemed eager
to get this resolved too.

Nathaniel knew that from a fundamental standpoint,
BK’s size was at the lower end of the spectrum of deals Mel-
ville would typically approve, but their growth over the
past four years and their projections for the next four pro-
vided merit for approval. Nathaniel considered those “5 Cs
of credit” he had studied in finance. Those ‘Cs’ now played
such a prominent role in his daily work life. They were key in
seeing creditworthiness and unlocking a borrower’s willing-
ness and ability to repay a debt. There were both qualitative
and quantitative measures to determine the chance of default
(see Table 2).
Bottle King Zhongshan’s year-to-year growth was
impressive but hard to fathom (see Table 3). Chris reminded
Table 2. 5 Cs of Credit
Character Borrower’s reputation. Are they responsible? Past behaviour,

expected future actions.
Capacity Borrower’s ability to repay based on a comparison of income and
debts. Are they financially overextended?
Capital Capital the borrower puts toward the investment; the larger the
contribution the less chance of default, ceteris paribus. How much
cash is on hand?
Collateral Property or large assets used to secure the loan. What do they
own? Can we get our hands on it?
Conditions Interest rate, amount of principal, and payment schedule. Are
things (revenue stream, customers, market, etc.) stable?
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Table 3. Bottle King Zhongshan Projected Annual Revenues

Source: Company financial statements as of September 2008.
Nathaniel that Melville’s high growth domestic market

clients were not even close to this. It was hard to gain proper
perspective. Nathaniel wished they had performance data
for this company or even others from a similar sector in
China — EDC was unable to turn up anything concrete for
comparison. The EDC Account Manager and his team had
checked EDC databases and found almost nothing at all on
BK and very little on this manufacturing segment in China.
Typically both EDC and Melville relied on industry and
company historical information to feed into their interpreta-
tions. EDC and Melville were both tentative about proceeding
without a good fundamental analysis.
EDC was able to determine that the accounting prac-
tices were unique compared to those in North America. The
Chinese government required each company to complete a
standard form and this form established the basis for annual
corporate taxation. It was a very rough financial picture, full
of gaps by Western standards. Both Nathaniel and the EDC
Account Manager were skeptical about the form’s veracity.
They wondered if any penalty existed in China for non-
compliance or submitting a misleading report.
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Nathaniel and Chris had the suspicion, that no respect-

able accounting firm in Canada or the US would let this
go — there were just too many gaps. And there was no way
to validate it without actually going to China. While Melville

had approved deals with unique risk variables in the past,
this one would be challenging.
Chris received a call from the EDC Account Manager
in Ottawa. The EDC Account Manager wondered if Chris
could meet to review the BK dossier via conference call.
Chris looked to Nathaniel. Nathaniel nodded indicating the
documentation could be ready next week. Nathaniel and he
agreed to join EDC via conference call from Vancouver.

Chris and Nathaniel resolved to maintain momentum
until a decision could be resolved on BK. Working closely
with the EDC Account Manager was expected to help identify
and qualify the risks.
Nathaniel conveyed to Chris that if Melville continued
to proceed with assessing ability to pay (viability), Melville
would need to be certain that Melville’s legal advisor was
satisfied with the legal recourse to place a lien on the equip-
ment. If BK could not pay, Melville would need the legal
framework in place to quickly seize ownership of the equip-
ment. Nathaniel concluded that they would be awaiting BK’s
response to the revised letter of intent.
Chris too felt it was essential to get a reaction to the
letter of intent — Melville might thus learn how serious BK
was about making the deal happen.
DOCUMENT REVIEW WITH EDC
19 September 2008, 8:45 am, Export Development Canada, Ottawa,

Ontario
Meeting Attendees:
• EDC Account Manager
• Several EDC small and medium-sized enterprises relations
Team Leads
• Chris Haselbach, CEO, Melville (via teleconference)
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230 ACRJ
• Nathaniel Shaw, Senior Vice President, Melville (via tele-

conference)
The EDC Account Manager welcomed Chris and

Nathaniel to the conference call and explained that several
members of the EDC team were in the room. The EDC
Account Manager indicated that Melville’s documents
were being projected onto a screen and asked them to walk
through BK’s company profile, financials, and then the credit
application and assessment.
Nathaniel informed those assembled in Ottawa that he
had received a surprising update.
Nathaniel announced that James Chui had sent Melville

an email to correct a misinterpretation with BK’s financial
statements. According to James, the translators missed a key
detail when they translated the Chinese government financial
statements for each year. Melville now had in its possession
confirmation that the financial statements were off by a factor
of 10.
Nathaniel explained that the accounting practices in
China, and that province in particular, removed a zero at
the end of financial statements. It was a Chinese accounting
method that the Canadian translators had missed. Bottle King
Zhongshan was not a US$9.3 million company, but a US$93.1
million company. James had verified this accounting practice
with the existing BK accountant who had sent over docu-
ments used in negotiating with Coca-Cola three years prior
(see Tables 4, 5, and 6).
Nathaniel then relayed that EDC’s legal counsel made
them aware that a new law in China would allow for liens
to be taken. Melville’s lawyer called to confirm the enforce-
ability of a lien on the equipment under Chinese law in case
of a default on the loan. It was not a certainty, but they were
confident the Chinese government could step in. However,
Melville’s lawyer did confirm that there was no record of the
successful application of a lien in Zhongshan. In summary,
if BK did not pay, Melville would have little recourse but to
seize the equipment and try to recoup some of its losses but
through a very new and untried Chinese law.
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Table 4. Bottle King Zhongshan Revenues

Table 5. Bottle King Zhongshan Annual Revenues
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232 ACRJ
Table 6. Bottle King Zhongshan Projected Annual Revenues

Nathaniel navigated through the key points of the

deal and the EDC Account Manager used this time to under-
score EDC’s reliance on formal financial analysis. Forty-five
minutes into the documentation review, all of the essential
documents were covered. Nathaniel remained tentative on the
potential of this deal. Given that BK had no previous relation-
ship with KM, Melville or EDC, Chris would have preferred
better quality information to guide their decisions. If only
there was another way to gauge BK’s intentions and capabili-
ties to handle this debt load.
Chris divided the arguments into points for and against
providing financing to BK. In his mind he weighed the
impact of a defaulted loan. What would it mean for Melville?
How would it affect his team and his relationship with EDC
and KM?
Continuing now, the EDC Account Manager shared
that EDC had held off on making comments so that Nathaniel
could maintain his objectivity through this process. EDC
would like to help support KM and Melville in making this
happen, but it must be understood that although this was a
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strategic opportunity, the EDC Account Manager was not yet

comfortable forwarding this for approval.
Chris revealed that he too saw this as a tough decision.
He appreciated the EDC Account Manager and EDC team’s

frankness and noted that for Melville and him there too was
no clear pathway on this deal and that time pressures only
further complicated it.
Nathaniel shared that BK had approved the letter of
intent without requesting further revisions. A signed copy
was due to arrive tomorrow at the Vancouver office via
air-courier.
Chris sat quietly for a few seconds assessing these new

pieces of information carefully. Breaking the silence he asked
their EDC Account Manager if he wanted to visit Zhongshan
early next week with Nathaniel.
Chris Haselbach, CEO of Melville, would need a recom-
mended course of action on their return from China. Chris
would need a justification of how they should continue and
whether or not they should approve or deny BK’s request for
funding?
Both the EDC Account Manager and Nathaniel needed
to prepare if they were going to get at Bottle King Zhong-
shan’s ability and intent to repay a loan from Melville Corpo-
rate Finance: Who should they visit? What questions would
need to be asked?
APPENDIX
ABOUT THE PLAYERS
Melville Corporate Finance, Inc.
Chief Executive Officer: Chris Haselbach — founder and

major shareholder. He was a former employee of the Depart-
ment of Foreign Affairs and International Trade, Business
Development Bank of Canada, and Export Development
Canada. Under Haselbach’s leadership Melville had main-
tained strong partnerships with Canadian exporters and
EDC.
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234 ACRJ
Senior Vice President: Nathaniel Shaw — in charge of

overall management and operations for Melville’s team of 16
employees, with offices in Vancouver, Toronto, Montreal, and
Calgary. He worked on analyzing risk and creditworthiness.

He had the ability to gain insight quickly to support decision-
making. He was trusted for new and high value proposals —
his industry experience was an asset.
Background
Melville was a private firm created to support Canadian

exporters by offering financing to creditworthy buyers of eli-

gible Canadian goods and services. Melville’s acted as a uni-
fying partner between the private sector and Canadian public
sector actors (federal and provincial bodies). Melville worked
with the support of various provincial and federal export-
related institutions such as EDC, Western Economic Diver-
sification, Business Development Bank of Canada (BDC),
Canadian Commercial Corporation (CCC) and Foreign Affairs
and International Trade Canada (DFAIT). Melville was prof-
itable because they operated in the niche market of export
financing for small and medium-sized transactions. They
were able to dedicate more time and attention to smaller
and more complicated foreign loans that the large Cana-
dian banks did not have the expertise and risk appetite to
support directly.
Melville’s target market in Canada was small and
medium-sized enterprises (SMEs). SMEs were a major eco-
nomic engine of growth for the Canadian economy and an
area of strategic importance to EDC. Melville relied on EDC
to provide insurance against nonpayment by the foreign com-
panies. In order to be eligible for financing, exported goods
and services had to satisfy Canadian benefits requirements of
EDC.
Through Melville’s agile assessment, approval, and
financing mechanisms Canadian exporters could expand into
the global market with minimal risk. A Melville financed
transaction allowed the Canadian exporter to be paid imme-
diately while the buyer paid Melville over time at the agreed
01_S0218927514500096.indd 234 29/1/2015 9:22:18 AM

upon terms. Most of the risk of nonpayment was absorbed by

EDC through insurance coverage provided to Melville.
Every deal posed direct risk to Melville’s financial
health. Depending on the terms of the financing, Melville

could be exposed significantly. This made EDC’s role vital.
If a deal failed, i.e., a borrower defaulted on their loan, this
would considerably hurt Melville’s balance sheet. Other
forces included waiting periods, interest, collection costs, etc.
Despite the reality of these constant concerns, Melville had a
consistent record of accomplishment in qualifying good deals.
Without EDC’s insurance, Melville could not proceed with
this or any financing. Melville, or for that matter any Cana-

dian company venturing abroad, could expect to encounter
all sorts of problems in collecting payment. Even if a party
were willing to make payment, barriers might exist, such as
restrictions on currency exchange and transfer.
Melville’s Performance in Recent Years
• Annual disbursements of US$160 million, stable and

increasing revenue.
• Solid track record of backing growth companies and good
deals.
Melville Offered
• Export financing for SMEs.

• In most cases, payment within 10 days of shipment to the
foreign buyer (provided all obligations under the sales con-
tract with the buyer had been met).
• Quick application processing did not hold up the sales
process.
• Loan negotiations were handled by Melville.
Benefits for International Buyers when Using Melville
• A quick turnaround of buyer applications for buyer

financing (within 10 days).
• Loans were available to the buyer in several approved
currencies.
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• Loan documentation was standardized for greater efficiency.

• Competitive interest rates.
• The interest rate was fixed and would not fluctuate with
the movements of interest rates on international money

markets. Alternatively, variable interest rates were available
to suit client needs.
Benefits for Term Finance
Fixed-rate, medium-term loans, from two to five years were

available from Melville to foreign buyers, providing them
with a regular repayment schedule. These loans were for

amounts up to US$5 million, and were secured by a regis-
tered liena on the exported goods.
EDC’s Export Guarantee Program
To compensate EDC for taking on their spread of the loan’s

risk (85%), EDC charged an annual fee of 2.25% of the total
loan (paid each year for the life of the term and re-calculated
annually based on the outstanding principle). For this loan,
the terms were 3-year repayment term at a fixed rate of 6%
payable to Melville. EDC charged an additional 2.25% on top
of this rate.
Export Development Canada
EDC Account Manager — had worked directly with Chris

Haselbach and Nathaniel Shaw on several deals over the past
three years and served as an essential partner in identifying
and assessing risk management issues.
aA lien allowed the holder of it to take possession or control of property belonging to
another until a debt owed by that party is discharged.
01_S0218927514500096.indd 236 29/1/2015 9:22:18 AM

Background
Supporting Canadian exports and foreign direct investment,

EDC was Canada’s export credit agency. EDC offered inno-

vative financing, insurance, and risk management solutions
to help Canadian exporters and investors expand their inter-
national business. Every year, EDC’s knowledge and partner-
ships were used by over 6,400 Canadian companies and their
global customers in up to 200 markets worldwide. Approxi-
mately 80% of EDC’s customers were SMEs. EDC was a
crown corporation wholly owned by the Government of
Canada. The corporation was financially self-sustaining and
operated on commercial principles.

Export Development Canada’s mandate was to grow
and develop Canada’s trade, and the capacity of Canadian
companies to participate in and respond to international busi-
ness opportunities. EDC provided trade finance and risk miti-
gation services to Canadian companies to help them compete
internationally. Partnering with Melville Corporate Finance,
EDC had participated in approximately C$1.6 billion in deals.
EDC provided a number of risk mitigation solutions
to Canadian exporters. EDC offered Canadian companies the
creditworthiness ratings of potential foreign customers. This
gave them an idea of the likelihood of repayment by that
buyer. For Melville, such a credit check would give them an
idea as to whether or not a foreign corporation could fulfill
its payment obligations. EDC also provided other financing
mechanisms for foreign and Canadian companies to gain
access to working capital.
Bottle King Zhongshan
CEO and Chairman of the Board: Hong Zhen — company

founder, who — despite his age, still maintained direct
involvement in operations and decision making, thus lever-
aging his more than three decades of experience in the
industry. His political clout in the local region was also
known to be strong. Hong Zhen was admired and respected
for his contribution to the community.
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238 ACRJ
Background
Bottle King Zhongshan was founded in 1982; its head office

and principal manufacturing facilities were across from

Macau, in a special economic development zone in Zhong-
shan in the province of Guangdong. When BK was estab-
lished, its original activity was boat repair. From those
humble beginnings, the company quickly entered into two
new areas: textiles and plastic packaging. In 1985, BK pur-
chased from Japan its first injection molding equipment to
manufacture the bottles locally to save cost, and it was able
to secure contracts with Coca-Cola and Pepsi for their bottling
needs.
Over this time period, BK’s business expanded rapidly.
BK grew from one small local factory to 10 large modern
industrial enterprises in Zhongshan, and approximately
100 subsidiaries located throughout the whole of China. BK
employed 4,000 workers and administrators, including 600
engineers and technicians. Every employee was a shareholder
of the company.
For the past decade, Bottle King Zhongshan had been
dedicating itself to the development of food and beverage
packaging and non-woven cloth products. Following a
regional development strategy, whereby the company was no
further than 600 kilometers from its most important clients,
BK had become a China-wide enterprise.
Additionally, there was a current drive at BK to
increase exports, which only comprised 2% of the company’s
revenues. BK was placing a significant focus on Southeast
Asia with its relatively new operation in Thailand (the market
that would be served with this equipment from KM).
Market & Competition
Based on performance statements from Coca-Cola and Pepsi

the following summary had been compiled.
With regard to the soft drink industry in China, the market
has experienced rapid development in the food industry.
The key drivers were hot weather and increasing pros-
perity. The Chinese market however has proven to be very
01_S0218927514500096.indd 238 29/1/2015 9:22:18 AM

diverse with great variations in the market demand for

different products. Carbonated drinks have shown strong
demand throughout. Growth in almost all types of drinks
is expected to continue to see strong growth in the near

term.
BK had been a manufacturer of PET bottles and a major
vendor for Coke and Pepsi in China for over two decades.
BK supplied 40% of Coca-Cola’s needs, 15% of PepsiCo’s,
and about the same for a leading Chinese beverage company.
It was expected that the bottling industry would consolidate
and BK was in a position to benefit as the total volume of
soft drinks in China was expected to increase at three to five

percent annually.
Regional Connections and Strategic Investments
Rapid growth rates in Guangdong Province as a whole was

mirrored by many companies. This presented a synergistic
opportunity for BK to expand via stronger and more inte-
grated business relationships with these growing enterprises.
Hong Zhen sought to leverage his family’s business
network to establish shared ownership arrangements and
strategic investments in Yingde City (population 1,050,000)
and Dongguan (population 8,000,000). As it happened, two
of his uncles were minority owners of a Chinese holding
company, Guangdong Corporation, whom was aggressively
franchising convenience stores (franchising a well-known
Japanese convenience store brand). As Guangdong Corpo-
ration worked to establish its supply chain locally, they also
sought a local partner through whom they could “integrate”
and balance supply risk variables. The president offered a
minority ownership stake to Bottle King Zhongshan and
additional shares to Hong Zhen and his two uncles in mid-
2004. As a sign of good faith and desire for partnership, Hong
Zhen arranged for Guangdong Corporation to own a small
mix of preferred and minority equity in BK.
The growth of BK’s joint venture/ownership portfolio
surged in 2005 as Guangdong Corporation opened 40 con-
venience stores; another 12 were opened in 2006. The return
on investment was modest, however it was the assurance of
01_S0218927514500096.indd 239 29/1/2015 9:22:18 AM

240 ACRJ
demand for BK’s products that pleased Hong Zhen. Further-

more, the relationship ensured alternative suppliers would
not be sought in the foreseeable future and BK would be best
positioned to adapt if supply requirements changed for the

convenience store chain. Strategically, the timing of the move
made sense for all those involved and aligned key persons to
a common set of business objectives and gain leverage within
the supply chain. As an additional, unexpected, reward
for his business acumen, Guangdong Corporation, subtly
informed Coca-Cola and Pepsi’s regional account managers of
their deal with BK — in effect, this benefit of this relationship,
was leverage over Coca-Cola and Pepsi for current and future
contracts in the region.
BK’s financial statements (Balance Sheet and Income
Statement) are found in Exhibits 1 and 2.
Kohen Manufacturing
Asian Markets Sales Lead: James Chui was born in Hong

Kong. He immigrated to Canada and graduated from the
University of Ottawa. He was recruited in 2001 by KM’s VP
Sales to lead a major expansion into non-domestic markets of
China, Thailand, Japan, South Korea, and Taiwan. Mr. Chui
had worked in the industry since 1990.
Background
Founded in 1977 in Edmonton, Alberta, KM was a diversified

manufacturer and exporter of products ranging from standard
plastics preform production equipment to large-scale custom
mold design. KM plastic preform and molds equipment used
industry leading engineering and design for the production of
plastics found in everyday life (bottles, containers, bottle caps,
and more).
Beginning in mid-2006 Kohen Manufacturing had
decided to actively pursue sales growth in Asia. Soft drink
consumption — the key diver of demand for KM’s tech-
nology — was rapidly increasing in this region of the world.
KM’s market share had continued to climb and in the past
01_S0218927514500096.indd 240 29/1/2015 9:22:18 AM

year, sales were sufficient in Asia to begin strategic planning

to open a new production facility in South Korea. During
the last three years, KM had completed transactions in over
35 countries and a substantial base of users was now in Asia.

Being located in the Asia-Pacific region offered a number of
benefits in serving these customers. First, it showed commit-
ment and a willingness to interact with Asian customers. This
aided in understanding requirements and technical specifica-
tions. Finally, being located in Asia reduced costs associated
with design, development, and transportation of bottling
equipment. According to their website:
KM’s goal is manufacturing the best quality products while

maintaining competitive pricing and prompt delivery time
for our customers. Quality control is a major competitive
advantage within the industry and KM achieved ISO9001
(2000 version) in the fall of 2002 and are now a fully certi-
fied manufacturer.
KM had established a worldwide reputation for quality
products with a relatively favourable benefit-cost realiza-
tion for purchasers. In addition, a major advantage over their
competitors was a continuous focus on innovation in design.
Over the past three years several PET preform equipment
designs received awards for being economical and having
short production start-up times.
Previous and Ongoing Deals with Melville
Since James had arrived, KM had relied on Melville’s flex-

ible and responsive services to streamline its rapid expansion
into Asia. KM had established itself as a high quality exporter
with good business values and trustworthy conduct during
the exporting process. Total cumulative value of KM-EDC/
Melville deals reached US$100 million in 2006. Currently,
Melville was working on financing for additional KM sales;
most of which were multi-year financing in Asia and Eastern
Europe.
01_S0218927514500096.indd 241 29/1/2015 9:22:18 AM

242 ACRJ
Relationship with Export Development Canada
Kohen Manufacturing had maintained an excellent record of

performance and repayment when directly using EDC ser-

vices. However, since the arrival of James Chui at KM, the
sales team had preferred the immediate financing advantage
provided by Melville over managing a loan within KM’s
finance department.
Direct Competitors
Sidel, Inc was located in Georgia — the home of Coca-Cola.

Sidel was part of the Tetra Laval Group, a global leader in

food packaging and equipment. There was every likelihood
that Sidel had been considered by BK. Sidel was pushing an
alternative technology — stretch blow molding. KM believed
that their own equipment could generate greater throughput
(volume of PET bottles formed per minute) than any current
Sidel models.
Hovert Impex was based in Ahmedabad, India. While
Kohen could argue that Hovert Impex’s technology was
much less modern, it had been proven to be cost-effective in
developing countries. Maintenance costs were low for Hovert
Impex customers, even if the equipment were not nearly as
state-of-the-art as KM’s fully automated machines.
Nissei and Aoki were two prominent players in the
PET bottle production equipment industry. These compa-
nies from Japan were well established in the region and it
was likely that BK had a number of their bottle production
lines currently in use. While Nissei and Aoki already had
market penetration in China, they did not have unblemished
reputations in day-to-day operations. Nissei and Aoki equip-
ment had reliability issues and were known to be over-engi-
neered, requiring knowledgeable operators to keep the finicky
machines running.
01_S0218927514500096.indd 242 29/1/2015 9:22:18 AM

RISKS AND MITIGATING FACTORS
China was a massive country with the highest of expecta-

tions for growth and prosperity (see Exhibit 3). But with very
little comparable data available broken down on regional and
sectoral performance, both EDC and Melville were nervous.
EDC’s office in Beijing had existed for quite some time, but
the office in Shanghai had just opened in late 2006. This office
covered the booming Yangtze River Delta region and was
getting to know that part of China. EDC’s Shanghai office
boasted being in the business capital of China and focused
on the provinces of Jiangsu, Zhejian, and Anhui. Despite

being an economically well-off province (its GDP was US$522
billion), Guangdong was politically distant from Beijing.
Guangdong was relegated to a lower status when it came to
most matters. Other regions with more political clout received
greater attention from national authorities.
The stability of the central federal government authority
was striking and local leaders had to stay in line. But still
there were wide discrepancies from region to region. The
EDC Account Manager had firsthand observations and stories
relayed by EDC colleagues confirming that a local mayor or
business family could take his or herb town in a direction that
could shake things up for outside interests. While political
risk was not great, it was real. EDC’s political risk insurance
covered the following scenarios (Exhibit 4):
Zhongshan, China
Zhongshan was a prefecture-level city situated in the centre

of the Pearl River Delta of Guangdong Province (see Map
of Region). It faced Hong Kong on the east across the Ling-
ding Ocean, Xinhui and Taishan on the west, with Macau
and Zhuhai to the south. It was 100 kilometers away from
b The People’s Daily newspaper reported on 5 July 2002 that about 10 percent of
China’s 5,000 major cities had a female mayor or vice-mayor. The Chinese govern-
ment affirmed in its Program for the Development of Chinese Women (2001–2010)
that “more efforts should be made to improve women’s capacity in management
and decision-making in state and social affair, and increase the proportion of women
leaders.”
01_S0218927514500096.indd 243 29/1/2015 9:22:18 AM

244 ACRJ
01_S0218927514500096.indd 244
Guangdong, China
Map of Region: Zhongshan, Guangdong
29/1/2015 9:22:18 AM
Guangzhou and a high-speed ferry serviced Hong Kong.

Zhongshan held historic and political significance as it was
renamed for Dr. Sun Zhonghsan (a.k.a. Sun Yat-sen), the
“father” of modern China who overthrew the feudal Qing

Dynasty. The city authorities had attempted to balance a
pleasant living environment with industrial growth. Most vis-
itors found it warm and charming and less frenetic than other
high-growth areas of China. The city boasted having opera-
tions for 20 of the Fortune Global 500 and a thriving high-
tech sector.
Unusual by Chinese standards it was missing an
administrative layer — Zhongshan had no county-level divi-

sion. Zhongshan held 22 townships under its control and
itself fell under the guidance of Guangdong authorities.
In additional to the 22 towns, Zhongshan city government
directly oversaw four district offices and the Zhongshan
Torch Park (high-tech industrial development zone). While
holding on to its lineage as the “Fragrant Mountain” town,
Zhongshan welcomed the move to diversify from its tradi-
tional agricultural base, including rice, lychee, banana, sugar
cane, and its famous flowers — particularly chrysanthemum.
Zhongshan was one of the Four Little Tigers in Guang-
dong, the others being: Dongguan, Nanhai, and Shunde.
These four economically virile centres served as exemplars
for others to emulate. Zhongshan’s thriving state-owned
enterprises in the 1980s gave way to township and village
enterprises and more recently to foreign multinationals.
Zhongshan was known by the credo “One industry in one
town.” Pillar industries included: mahogany furniture from
Dachong (500 local enterprises accounted for 60% of China’s
output), electric household appliances manufactured in
Dongfeng, lighting fittings manufactured in Guzhen (over
3,000 lighting enterprises; 95% of Guzhen’s GDP came from
lighting), food from Huanpu, casual wear (blue jeans and
shirts) made in Shaxi, and locks, hardware, and electronic
acoustics from Xiaolan.
01_S0218927514500096.indd 245 29/1/2015 9:22:18 AM

246 ACRJ
Exhibit 1
Bottle King Zhongshan Balance Sheet

Year Ending Year Ending Year Ending Year Ending

In Millions of USD
2007-12-31 2006-12-31 2005-12-31 2004-12-31
Cash on Hand 0.90 0.60 1.90 0.08
HK Government Certificates of
7.80 1.95 0.80 0.01
Deposit Held
Investments in Subsidiaries and Joint

12.00 19.50 15.00 4.00
Ventures
Loans and Advances to Customers 24.52 22.30 19.81 12.30
Current Assets
33.50 21.80 15.55 4.50
(including land value)
Inventory 2.03 7.80 2.92 2.80
Total Assets 80.75 73.95 55.98 23.69
Short Term Debt 17.35 13.50 11.60 3.98
Long Term Debt 38.60 37.45 24.66 9.88
Chinese Government Currency

7.90 5.65 4.69 0.73
Notes in Circulation
Other Liabilities 3.50 1.51 5.73 3.44
Owner’s Equity 11.30 12.94 9.30 5.66
Minority Interests Equity 0.50 0.40 0.00 0.00
Preferred Share Equity 1.60 2.50 0.00 0.00
Total Liabilities 80.75 73.95 55.98 23.69
01_S0218927514500096.indd 246 29/1/2015 9:22:18 AM

Exhibit 2
Bottle King Zhongshan Income Statement

Year Ending Year Ending Year Ending Year Ending

In Millions of USD
2007-12-31 2006-12-31 2005-12-31 2004-12-31
Revenue 93.15 72.04 38.80 14.54
Operating Income 91.35 67.88 36.00 14.50
Other Operating Income

0.90 2.06 1.80 1.14
(joint ventures’ operations)
Interest Income 4.25 4.25 2.25 1.25
Interest Expense -3.35 -2.15 -1.25 -2.35
Total Operating Expenses

88.90 68.14 24.55 6.28
(including depreciation)
Gross Profit (before taxation) 4.25 3.90 14.25 8.26
Taxation Rate (%) 13.86% 13.89% 15.41% 15.80%
Taxation 0.59 0.54 2.20 1.31
Profit/(loss) after taxation 3.66 3.36 12.05 6.95
Minority Interest Payments 0.05 0.04 0.00 0.00
Preferred Share Payments 0.08 1.20 0.00 0.00
Net Profit 3.53 2.12 12.05 6.95
Revenue Growth (%) 29.30% 85.67% 166.85% …
01_S0218927514500096.indd 247 29/1/2015 9:22:18 AM

248 ACRJ
Exhibit 3
EDC’s Position on China

CHINA
China consistently ranks as one of Canada’s top five export destinations. The country’s strong economic growth
continues to offer extensive opportunities for Canadian export businesses and investors. China is the base of
manufacturing operations for many Canadian companies that have incorporated the advantages of China’s low cost
of production into their global supply chains. However, in a market experiencing rapid evolution, there are potential
credit, regulatory and Corporate Social Responsibility risks that must be mitigated wherever possible.
Country Risk: Medium

EDC’s Position
> Actively seeking new business
> Open under all programs, subject to EDC’s regular approval criteria
Canada’s strengths in natural resources, agricultural, information and communication technologies, educational
services, automotive and environmental technologies make China a natural business partner to explore. In addition
to these sectors, EDC will look at transactions in any sector in which Canadian companies have found opportunities.
With representations in Beijing and Shanghai covering Greater China, EDC provides on-the-ground support to
Canadian companies doing business in China. EDC’s regional representatives have developed strong relationships
with major local clients and have created an extensive network of local contacts. EDC is well positioned to help
Canadian companies finance and manage credit risk associated with sales to Chinese buyers, and to support Canadian
Direct Investment Abroad and Canadian affiliate operations in China.
What is China Buying from Canada?
Canadian Export to China, 2007

Ranking Sector C$
1 Industrial Chemicals 1,485,261,032
2 Paper & Products 1,454,335,988
3 Non-Ferrous Metals 997,763,065
4 Metals, Ores, Non-metallic Minerals 987,208,476
5 Agriculture, Hunting, Forestry, Fishing 651,777,518
China’s Fastest Growing Sectors
Forecast of Domestic Market Growth, 2009

Ranking Sector %
1 Non-Ferrous Metals 32.4
2 Pottery & China 26.1
3 Motorcycles & Bicycles 23.3
4 Textiles 22.8
5 Agriculture, Hunting, Forestry, Fishing 22.5
Source: EDC website, September 2008.
01_S0218927514500096.indd 248 29/1/2015 9:22:18 AM

Exhibit 4
Political Risk Scenarios

Breach of contract risk: The breach of a contractual obligation by a foreign government or state-owned
entity and the ensuing refusal by the government or entity to honour an arbitral award in
your favour.
Non-payment by a sovereign obligor: The refusal or inability of a foreign government to make

scheduled loan payments or to make a payment under a guarantee.
Expropriation risk (including gradual or creeping expropriation): An act or a series of acts taken by a
foreign government to seize, confiscate or otherwise expropriate your assets or investments,
or foreign government acts that have had the effect of expropriation.
Political violence risk: Terrorism or other forms of political turmoil aimed at influencing the policies
of the host country government that damage assets or force you to shut down foreign
operations.
Conversion risk: The inability to convert the local currency of a foreign country into hard currency.
Transfer risk: The inability to transfer hard currency outside a foreign country.
Repossession risk: Measures that a foreign government may take that prevent you from repossessing
or re-exporting physical assets brought into the country (e.g. machinery, equipment, rolling
stock, an aircraft, etc.).
Source: EDC Website, September 2008.
01_S0218927514500096.indd 249 29/1/2015 9:22:18 AM

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ASIAN CASE RESEARCH JOURNAL, VOL.

18, ISSUE 2, 221–249 (2014)

Melville Corporate Finance, Inc.

Québec, Angeline Pacione of

© 2014 by the authors DOI: 10.1142/S0218927514500096

01_S0218927514500096.indd 221 3/2/2015 3:15:17 PM

Melville had financed previous KM deals and was

that another manufacturer — one of KM’s competitors —

ABOUT THE DEAL

On 1 September 2008, KM finalized the technical specifica-

Fig. 1. Relationships among participants

01_S0218927514500096.indd 222 29/1/2015 9:22:17 AM

(accounting reports estimated growth at 90% over the three

be contingent on a satisfactory inspection of operations.

25%. This was sufficient to meet growth projections for the

01_S0218927514500096.indd 223 29/1/2015 9:22:17 AM

recover the loan from BK directly. In other words, Mr. Chui

It was up to EDC and Melville to assess the viability

01_S0218927514500096.indd 224 29/1/2015 9:22:17 AM

BUILDING THE NECESSARY DECISION CRITERIA

Meeting with Nathaniel Shaw

12 September 2008, 4:00 pm, Melville’s Executive Boardroom, Vancouver

01_S0218927514500096.indd 225 29/1/2015 9:22:17 AM

Table 1. Bottle King Zhongshan Annual Revenues

Source: Company financial statements as at September 2008.

wondered if he was misinterpreting what he was seeing. Mel-

01_S0218927514500096.indd 226 29/1/2015 9:22:17 AM

Nathaniel would have Melville’s legal advisor include

Chris would then send that draft letter over to BK to commu-

to get this resolved too.

Character Borrower’s reputation. Are they responsible? Past behaviour,

01_S0218927514500096.indd 227 29/1/2015 9:22:17 AM

Table 3. Bottle King Zhongshan Projected Annual Revenues

Source: Company financial statements as of September 2008.

Nathaniel that Melville’s high growth domestic market

01_S0218927514500096.indd 228 29/1/2015 9:22:17 AM

Nathaniel and Chris had the suspicion, that no respect-

to validate it without actually going to China. While Melville

agreed to join EDC via conference call from Vancouver.

DOCUMENT REVIEW WITH EDC

19 September 2008, 8:45 am, Export Development Canada, Ottawa,

01_S0218927514500096.indd 229 29/1/2015 9:22:17 AM

• Nathaniel Shaw, Senior Vice President, Melville (via tele-

The EDC Account Manager welcomed Chris and

Nathaniel announced that James Chui had sent Melville

01_S0218927514500096.indd 230 29/1/2015 9:22:17 AM

Table 4. Bottle King Zhongshan Revenues

Source: Company financial statements as of September 2008.

Table 5. Bottle King Zhongshan Annual Revenues

Source: Company financial statements as of September 2008.

01_S0218927514500096.indd 231 29/1/2015 9:22:17 AM

Table 6. Bottle King Zhongshan Projected Annual Revenues

Source: Company financial statements as of September 2008.

Nathaniel navigated through the key points of the

01_S0218927514500096.indd 232 29/1/2015 9:22:18 AM

strategic opportunity, the EDC Account Manager was not yet

He appreciated the EDC Account Manager and EDC team’s

Chris sat quietly for a few seconds assessing these new

Melville Corporate Finance, Inc.

Chief Executive Officer: Chris Haselbach — founder and

01_S0218927514500096.indd 233 29/1/2015 9:22:18 AM

Senior Vice President: Nathaniel Shaw — in charge of

Calgary. He worked on analyzing risk and creditworthiness.