Sold on China

Companies in the consumer goods sector prove acquisition targets

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04 Oct 2013
Week in China

According to Chinese brand Midea, the average US home contains 50 different types of electrical appliance. In China the equivalent figure is less than 10. But as the company points out, that number is growing fast, due to urbanisation and burgeoning consumer spending. As WiC suggested in last week’s issue, it might partially explain too why Midea’s market capitalisation has surged to Rmb81 billion ($13.23 billion); and also why appliance retailer Suning has seen its stock price double since July.

Investors are sending a clear message: the Chinese consumer goods sector is where they are hopeful of the greatest growth.

Investors are sending a clear message: the Chinese consumer goods sector is where they are hopeful of the greatest growth

That’s reflected in Hong Kong’s IPO market too, where China-related consumer stocks have stood out. One of the city’s bigger listings this year was the $1.3 billion initial public offering for China Huishan Dairy. That deal, which began trading last month, offered fund managers a chance to buy into China’s second largest herd of dairy cows. With its Australian imported heifers and American feed, Huishan has positioned itself as a high quality local alternative to foreign-made infant milk powder.

Or take Tenwow, a Shanghai-based food and beverage maker, which also recently raised $203 million in a Hong Kong IPO, with HSBC acting as one of the bookrunners on the deal. Demand for the offering was so strong that the allotment for retail investors was 55 times oversubscribed. Tenwow’s shares rose 17% above their offer price on the first day of trading.

The same trend is evident in the M&A market. “Many foreign firms have been waiting for the right time to use mergers and acquisitions to grab a share of China’s consumer market,” comments Hong Kong’s Oriental Daily, and just this week KKR announced that it had paid about $550 million for a 10% stake in Qingdao Haier, China’s largest refrigerator and washing machine maker by sales. The deal marks the US private equity group’s largest investment in China to date.

A few weeks earlier, Svenska Cellulosa Aktiebolaget (SCA), which owns the tissue label Tempo, announced a $1.1 billion transaction to take full control of Vinda, China’s third-largest tissue company (the deal is subject to a shareholder vote). Southern Metropolis Daily reckons that SCA – which bought a 21.7% stake in the Chinese maker of nappies and sanitary napkins in 2007 – is interested not only in Vinda’s products but also its extensive distribution network.

Similarly, in August, French cosmetics giant L’Oreal offered to buy Hong Kong-listed Magic Holdings, a Chinese maker of cosmetic facial masks, for about $845 million. Magic has been selling MG-branded beauty products (such as facial masks with snail essence) for over a decade.

Many foreign firms have been waiting for the right time to use mergers and acquisitions to grab a share of China’s consumer market,” comments Hong Kong’s Oriental Daily

Tesco is taking a different tack. Having concluded it didn’t have the scale to compete independently in Chinese retail, it inked a deal with state-owned giant China Resources that folded Tesco’s 134 Chinese stores into a new joint venture. This makes the UK retailer the minority partner, but in an entity with a far larger presence in the consumer market. Unlike its exit from the US market, Tesco is this time opting for a smaller stake in a bigger pie (the new entity will have more than 3,000 stores). “Through this deal we have a strong platform in one of the world’s most exciting markets, and it will move us more quickly to profitability in China,” said Tesco’s chief executive officer, Phillip Clarke.

The prospects for consumer goods firms are not universally cheerful. The Hong Kong Economic Times says sales of some higher-end products will continue to suffer as the country’s anti-corruption drive continues. Small wonder that the stock price of Kweichow Moutai – one of the largest and most prominent makers of baijiu (a grain wine, see WiC210 for more on the shake-up currently underway in the sector) – slumped to a three-year low this week.

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