March 3, 2014
Industry Updates  
FMCG - Fast Moving Consumer Goods
China Services PMI Continues Dip in January
In January, the HSBC’s Services Purchasing Managers’ Index (PMI) retreated to 50.7, the lowest level seen in two and a half years. The index retreated further from a reading of 50.9 in December. Similarly, the Non-Manufacturing PMI published by China’s National Bureau of Statistics (NBS) has also dipped from 54.6 to 53.4. The disappointing figures suggest that the Chinese economy has yet to position itself on a prominent path towards recovery as it shifts from an export-based model to a consumption-based model. According to an analyst poll conducted by Reuters, China’s economy is projected to grow at 7.4% this year, outpacing other major economies but still marking its worst performance in 24 years. This figure is a slight slowdown from the 7.7% growth reported in 2013.
 
 
China’s Inflation at Eight-month Low in January
According to China’s National Bureau of Statistics (NBS), China’s annual consumer inflation unexpectedly slowed to an eight-month low of 2.5% in January from the same reading of 2.5% in December. The moderate price increase in January contradicted the typical pattern of a spike in prices ahead of the nation’s Spring Festival New Year holiday which begins at the end of January.
 
With food accounting for roughly one-third of China’s consumer price index, it is the biggest short-term factor driving the country’s swings in inflation. Pork prices, being the biggest single determinant of domestic food prices, have declined in recent months as pork production gradually recovers from a slump since 2013. Despite fruit and vegetable prices climbing towards the end of January, falling pork prices were enough to contain overall inflation recently in China.
 
 
Alibaba Offers to Acquire AutoNavi for USD1.6bn
Alibaba Group, China’s largest e-commerce firm, has made an unsolicited offer to take over AutoNavi, the US-listed Chinese digital mapping and navigation software company in an all-cash deal that values the firm at USD1.6bn. Prior to the offer, Alibaba already held a 28% stake in the firm that was purchased for USD294mm in 2013. The transaction yielded an implied valuation of USD1.05bn for AutoNavi at the time.
 
The acquisition would enable Alibaba to increase revenues of its brick-and-mortar clients by better integrating the former’s ‘points-of-interest’ data into navigation software for consumers. The software will include customer reviews of shops and restaurants, along with a payment service for goods prior to arriving at a shop.
 
 
Chinese Smartphone Manufacturer Xiaomi Expands Overseas
Encouraged by its enormous success within the domestic market, Chinese smartphone manufacturer Xiaomi has targeted expansion efforts overseas. The company has designated Singapore as its first market outside the Greater China region, with a launch in Malaysia to follow soon after. In addition, Xiaomi is also considering entering the Indian market where the smartphone penetration rate remains low compared with developed nations.
 
By targeting the mid and low-end market segments, Xiaomi has enjoyed immense popularity among Chinese consumers that rivals that of Apple in China. Xiaomi has accomplished this by introducing phones that contain processors nearly as powerful as those in the latest Apple and Samsung smartphones that sell at less than half the price of the latter two brands. In 2013, Xiaomi sold 18.7 million smartphones, an increase of 160% y-o-y from 2012. This translated into RMB31.6bn (USD5.22bn) in revenue during the year, up 150% y-o-y from 2012.
 
 
China’s Dining Industry Expands at Slowest Pace in 22 years
Domestic restaurant sales increased 9% y-o-y to RMB2.5tr (USD406bn) in 2013, marking the first time China’s dining industry experienced a single-digit growth rate since 1991, according to the nation’s Ministry of Commerce (MOFCOM). The only exception was in 2003, when many restaurants suspended business operations due to the widespread SARS epidemic.
 
Economists believe that China’s new administration was the main driver behind the decline with the administration’s austerity campaign in a bid to crack down on corruption, gifting and luxurious bureaucratic banquets held by Chinese officials. The campaign had affected high-end restaurants the most, with revenue at 90% of these restaurants in China falling in 2013. As a result, the domestic restaurant sector has shifted towards a more middle-tier approach that targets China’s rising middle-class households.
Food & Beverage
Foreign Dairy Firms to Ramp Up Presence Across China
Over the past few years, foreign dairy companies have increased their investments in China's dairy industry. For instance, Danone raised its stake in China Mengniu Dairy from 4% to 10% with an investment of USD667mm in February 2012. During that year, foreign private equity firm RRJ Capital also invested USD251mm in a JV with China Bright Dairy.
 
Amid these inbound acquisitions, foreign dairy companies have sought superior distribution networks across China. At present, these companies have a strong supermarket & hypermarket distribution network in place across China’s tier-1 and tier-2 cities. However, distribution networks across the nation’s lower-tier cities are primarily dominated by domestic dairy companies. As a result, foreign dairy companies seeking to expand its presence across these cities should resort to cooperating with a domestic counterpart to gain access to widespread distribution in the most cost effective manner possible.
 
 
Feihe Dairy to Acquire Controlling Stake in Guanshan Dairy
Feihe Dairy, a subsidiary of Feihe International, plans to acquire a 70% stake in Guanshan Dairy for USD49mm. Guanshan is currently the largest goat milk powder manufacturer in China. The acquisition will enable Feihe to expand its goat milk powder operations that primarily cater towards China’s high-end consumers. In addition to expanding its goat milk powder production, Feihe seeks to improve product quality.
 
As Chinese consumers generally prefer more expensive dairy products that are mostly safer and made from better quality ingredients, high-end segments such as goat milk powder has sizable growth potential looking forward. At present, China’s goat milk powder market is roughly USD496mm in size, which trails the traditional milk powder market by a large margin. However, the former’s projected growth is far more rapid, with the market expected to gross over USD3bn in revenue within the next five years.
 
 
Wine Producers Remain Bullish in the Long Run
In 2013, wine consumption declined 2%, marking the wine sector’s first decline following a decade of robust growth at roughly 25% per annum. The decrease in sales has primarily affected domestic wine producers, as over 80% of the roughly 171 million nine-liter wine cases sold across China in 2013 were produced domestically.
 
In 2013, Chinese consumers drank 1.5 liters of wine on average, trailing developed countries such as France by a wide margin, where average wine consumption per capita exceeded 51 liters during the year. Due to the large discrepancy, wine producers and distributors are highly optimistic regarding the future growth prospects of China’s wine industry. According to projections provided by Vinexpo, Chinese consumers are expected to consume 230 million nine-liter cases of wine in 2014. Among this consumption volume, Imported wine will comprise roughly 50 million nine-liter cases, an increase of nearly 50% y-o-y.
 
 
Fosun to Support Expansion of Malaysian Restaurant Chain
Domestic leading investment company Fosun plans to invest USD33mm in Secret Recipe, a Malaysian restaurant chain with a presence across China. The company operates over 50 stores across the nation that serve pastries, coffee and Southeast Asian cuisine. Secret Recipe plans to use the proceeds to open 100 additional restaurants across China in future.
 
As China’s food services market continues to grow rapidly, foreign enterprises such as Secret Recipe have sought to increase their footprint in the world’s most populous nation. In 2012, China’s food service industry grossed USD380bn in revenue, with full service restaurants comprising over 70% of this figure, making it the largest sector by far. By 2017, the entire domestic food service industry is projected to gross over USD510bn in revenue as forecasted by Euromonitor. As a result, industry insiders have expected an increasing number of foreign cuisine restaurants to open up across China as domestic consumers gradually develop an acquired taste for foreign delights.
 
 
Domestic Sales of Oreo Biscuits Dip amid Slowing Chinese Biscuit Market
In 2013, international biscuit maker Mondelez reported a 4.1% decline in Asia Pacific sales revenues. The company reports that the decline is largely attributed to its Oreo brand experiencing a 15% dip in sales across China during Q4. Furthermore, the company has accumulated unsold inventory due to a demand shortfall across the nation.
 
According to Euromonitor, biscuit sales in China reached USD8.3bn in 2013. Although Oreo biscuits still hold the largest market share with 9.9% of industry sales, the brand’s growth has dipped sharply from 18% y-o-y in 2012 to just 3% y-o-y in 2013. Industry insiders believe that the declining growth is largely attributed to changing consumption habits. As consumers are becoming increasingly health conscious, they are resorting to healthier alternatives such as fruits and yoghurt.
Industrials
HSBC February Flash China Manufacturing PMI Dips to 48.3
The HSBC Flash China Manufacturing PMI dipped to 48.3 in February, down from January’s reading of 49.5. The decrease marks a seven-month low along with the second consecutive month that the reading has remained in contractionary territory with a reading below 50.
 
Despite the consecutive drop, economists advised against dwelling excessively on this month's preliminary figures, as February has fewer working days than the average month. Furthermore, this year’s Lunar New Year festival, which covered the first week of February, likely affected factory output as manufacturers shut for China's most prominent annual holiday period. As a result, February’s PMI figures are usually deflated and do not portray an accurate image of China’s present economic situation.
 
 
China to Comprise 28% of Global Infrastructure Investment Until 2030
According to leading consulting firm McKinsey & Co., global investments in infrastructure are expected to total USD57tr during the next 18 years, with China expected to comprise USD16tr during this period. In other words, nearly USD1tr will be invested in China's infrastructure each year until 2030.
 
McKinsey defines infrastructure as roads, railways, ports, airports, power plants and telecommunication networks. The massive spending on infrastructure will be driven by China's ambitious urbanization plan, which will aim to urbanize at least 70% of the nation’s population (1.05 billion people) by 2030. As a result, China’s state-owned banks such as China Development Bank, China Construction Bank and Bank of Communications have ramped up loans for construction companies undertaking key infrastructure development projects in support of the nation’s urbanization effort.
 
 
Caterpillar Remains Committed to China’s Mining Sector
In addition to a weak global economy, Caterpillar CEO Doug Oberhelman believes the current slowdown in its mining equipment orders in China is also attributed to the changing focus of the company’s key domestic mining customers. Mr Oberhelman reveals that some of Caterpillar’s key customers in China have recently restructured their management teams, with the respective new management teams strongly emphasizing cost-cutting and more efficient asset utilization. As a result, these key customers have decided to rely more heavily on existing equipment, thus scaling back on new equipment purchases.
 
Nevertheless, Caterpillar remains committed to China’s mining sector in general, as the sector has become more profitable to Caterpillar than the domestic construction and industrial sectors. During the past few years, the company has also made mining equipment its core focus regarding its global M&A activity. Caterpillar’s recent notable transactions in the mining equipment sector include its USD7.6bn acquisition of Bucyrus, a U.S. giant excavator and shovel manufacturer, in 2010, and the controversial USD654mm acquisition of ERA Mining, a Chinese mining equipment company, in 2012.
 
 
Central China an ‘Ideal’ Location for Industrial Enterprises
According to China’s government officials and business leaders, China's central region is still the ideal destination for industrial transfers due to the raft of advantages it offers companies. The conclusion has not only taken into account wage levels, but also living costs, land prices and supply, innovation capabilities and supporting industries. According to Xie Fuzhan, governor of central China's Henan Province, Central China still enjoys relatively low overall costs and distinct advantages in labor skill over emerging economies such as Vietnam.
 
According to the National Bureau of Statistics (NBS), China’s six central provinces, Shanxi, Anhui, Henan, Jiangxi, Hunan and Hubei, are home to a quarter of China's population and account for 20% of the nation’s GDP. Although the minimum monthly wage in central China has tripled to RMB1,200 (USD 194) during the past seven years, along with rising land prices that have accompanied China’s urbanization efforts, economists believe the region still remains attractive for companies, especially multinationals.
 
 
Chengdu Planning To Construct New Airport
The Chengdu government is planning to construct a new airport for the city located in the nearby region of Jianyang which will act as a major hub for travelers from Europe and the Middle East. However, construction will only begin in 2015 or 2016 at the earliest. Since 2011, Chengdu’s current airport has overtaken Shenzhen’s airport to become China’s fourth busiest airport in terms of passenger throughput. In 2013, more than 30 million passengers have traveled through Chengdu’s airport.
 
According to China’s Civil Aviation Authority (CAA), passenger throughput rates have increased rapidly in Central and Western China’s airports. From January to November in 2013, Central and Western China’s airports have seen increases of 13.7% and 13.14% in passenger throughput, whereas in Eastern China’s airports, the increase was just 6.4%. As China’s interior regions continue to develop, passenger throughput in these regions will likely continue increasing, and the nation will certainly see further construction of new airports along with capacity expansions of current airports in the long run.
Logistics
Global Logistic Properties Raises USD2.5bn in Share Sale
Global Logistic Properties (GLP), a large Asian warehouse operator, will raise USD2.5bn by selling up to a third of its Chinese business to state-backed investors, in a deal that highlights the explosive growth of China’s logistics industry. According to GLP Chairman Jeffrey Schwartz, the proceeds will be allocated towards making new investments across China’s logistics sector. Via its partnership with the state-backed investors, GLP will be able to leverage local connections and access additional funds to support its future expansion plans. At present, GLP has nearly nine million square meters of existing warehousing space, giving it roughly 20% of the entire Chinese market.
 
As China’s rapidly expanding retail and e-commerce sectors have led to surging demand for rapid delivery of goods across the nation, logistics has become an increasingly mainstream investment focus in China. At the end of 2013, warehousing space per capita in China stood at roughly 10% of that in the U.S. and UK. In addition, logistics costs are nearly twice as expensive in China compared with its western counterparts. As a result, economists expect the bulk of future logistics investments to be geared towards expanding warehousing capacity along with improving warehousing automation in a move to streamline costs.
 
 
Sinotrans Shipping Purchases Six Energy-Saving Vessels for USD162mm
Leading Chinese logistics company Sinotrans Shipping has placed an order to purchase six new energy-saving dry bulk carriers from two major Chinese shipyards for USD162mm. According to Sinotrans’ management team, the price is viewed as a bargain due to low shipbuilding costs that have resulted from low raw material prices for relevant commodities such as steel. The order consists of two 78,000 dead-weight ton (dwt) ships that will be built at the Jiangnan Shipyard and four 64,000 dwt ships that will be built at the Chengxi Shipyard. All new ships are scheduled for delivery by H2 2015. The purchase of the new energy-saving vessels will enable the company to expand the capacity of its existing fleet of dry bulk vessels, along with making its shipping operations more energy efficient.
 
 
E-commerce Platform Suning Obtains International Express Delivery License
Leading Chinese consumer appliance retailer Suning has obtained an international express delivery license from China’s State Post Bureau, thus becoming China’s maiden e-commerce platform to provide an international delivery service. The initiative will enable the Nanjing-based company to expand its online retailing presence overseas while competing with global pure-play courier companies such as FedEx, DHL, UPS and TNT.
 
Prior to obtaining the international license, Suning had already obtained a national license and over 150 regional licenses for its domestic express delivery services across China. Over the past few years, various online shopping platforms have gradually entered China’s logistics sector. For instance, Jingdong Mall (JD.com) became China's first e-commerce company to obtain an express delivery license in 2012, while other online retailing platforms such as Vancl, Vipshop and Yihaodian soon followed. Industry insiders believe that the inherent trend was a direct result of service degradation among China’s own pure-play delivery companies due to increasingly severe industry price competitions. As a result, online retailing platforms had to establish their own delivery networks to avoid potential backlash from customers.
 
 
Chengdu Emerging as Logistics hub linking China with Asia, the Middle East and Europe
Chengdu is gradually emerging as a transnational transportation, distribution and logistics hub linking China with Central, South and Southeast Asia, the Middle East and Europe. The highways and railways passing through Chengdu extend in all directions, reaching everywhere from Thailand to Turkey, Kazakhstan, Iran and Russia. Furthermore, the Chinese government plans to establish highway links to India over the next few years.
 
Chengdu’s strategic location has led to the rapid development of the city’s economy over the past decade. In 2012, Chengdu ranked as the eighth-largest contributor to GDP among China's cities, with an economy worth USD125bn. During the year, Sichuan province’s overall contribution to China's GDP was USD368bn, which is roughly the entire GDP of Thailand. As Chengdu continues to develop as a regional transportation and logistics hub, an increasing number of multinational firms will be seeking to establish operations in the city and capitalize on its strategic benefits. At present, 238 of the world’s 500 largest corporations have established a presence in Chengdu, according to Fortune magazine.
 
 
Official Medicine Cold-Chain Logistics Standards Might Be Formulated Within 2 to 3 Years
After establishing testing laboratories for approving temperature-sensitive medicine products, nine state-owned medical enterprises including Jiuzhoutong, Shanghai Medicine, Huadong Medicine and Guangzhou Medicine, are seeking to collectively publish a report outlining official medicine cold-chain logistics standards within the next two to three years. Altogether, 27 medicine manufacturers will collectively test 111 different medicine products in the laboratories. Furthermore, a batch of medicine cold-chain storage equipment manufacturing firms and third-party medicine transportation enterprises will also take part in the testing procedures.
 
Despite the government’s attempt to enact the new medical logistics standards, industry insiders and Chinese consumers remain skeptical of domestically produced and stored pharmaceutical drugs, as China’s healthcare industry remains widely corrupted. For instance, leading multinational drug manufacturer GlaxoSmithKline (GSK) has recently faced charges for orchestrating a massive corruption scheme that involves promoting the widespread use of GSK’s products while maintaining artificially high prices.
 
Deals in China  
Inbound M&A
Date
Target Company
Deal Type
Buyer
Country of Buyer
Seller/JV Partner
Deal Industry
Deal Value
(USD mm)
Stake
Deal Status
2/27
Dihon Pharmaceutical Group Co Ltd
Acquisition
Bayer HealthCare
Germany
Dihon Pharmaceutical Group Co Ltd
Industrials
680
100%
Announced
2/25
Eight Elements Entertainment Ltd
Acquisition
China Star Entertainment Ltd
Hong Kong
Private investor
Consumer
103
100%
Announced
2/21
Jinchuan Group's Fangchengang copper smelter
Minority stake purchase
Trafigura Beheer BV
Netherlands
Jinchuan Group Co Ltd
Industrials
150
30%
Announced
2/18
Ashland Water Technologies
Acquisition
Clayton, Dubilier & Rice LLC
United States
Ashland Inc
Industrials
1,800
100%
Announced
2/12
Alibaba Group Holding Ltd
Minority stake purchase
Tiger Global Management LLC
United States
Giant Interactive Group Inc
Consumer
199
n/a
Announced
2/11
Kerr-McGee China Petroleum Ltd
Acquisition
Brightoil Petroleum (Holdings) Ltd
Hong Kong
Anadarko Petroleum Corp
Energy
1,075
100%
Announced
2/4
Altus Technologies Ltd
Acquisition
Anxin-China Holdings Ltd
Hong Kong
Private investor
IT
167
100%
Announced
Outbound M&A
Date
Country of Target
Target Company
Deal Type
Buyer
Seller
Deal Industry
Deal Value (USD mm)
Stake
Deal Status
2/18
Singapore
Global Logistic Properties Ltd
Minority stake purchase
Bank of China Group Investment Ltd ; Hopu Investment Management Co Ltd ; Institutional Investors ; Undisclosed investors
Global Logistic Properties Ltd
Logistics
163
2%
Announced
2/17
United States
ERG Resources LLC
Acquisition
Goldleaf Jewelry Co Ltd
ERG Intermediate Holdings LLC
Energy
665
95%
Announced
2/14
United States
Assets of Fisker Automotive Inc
Acquisition
Wanxiang Group Corp
Fisker Automotive Inc
Industrials
149
n/a
Announced
2/13
Hong Kong
New Heritage Holdings Ltd
Acquisition
Private investor
Private investors
Real Estate
122
65%
Announced
2/12
Hong Kong
China Mengniu Dairy Co Ltd
Minority stake purchase
Arla Foods Amba ; COFCO Corp ; Groupe Danone SA
China Mengniu Dairy Co Ltd
Food & Beverage
664
6%
Announced