China’s economy has been inconsistent as markets and consumer confidence shift. Private equity deals, however, seem to be on the rise.
Several months ago, Adam Roseman of ARC China wrote:
“The amount of capital going into private equity in China continues to surge, with over $30 billion in new capital raised in 2011. The number of private equity deals in China is also growing quickly.”
Still, the situation is not as simple as it may seem.
“More money in, however, does not necessarily mean more money will come out through IPOs or other exits. In fact, on the exit side of the ledger, there is no real growth, but instead probably a slight decline, as the number of domestic IPOs in China stays constant and offshore IPOs (most notably in Hong Kong and USA) is trending down. M&A activity, the other main source of exit for PE investors, remains weak in China,” he continued.
Earlier this year, China’s online luxury market’s revenue grew to over 10 billion yuan, or $1.59 billion. A report claims that the sector will continue to grow on a yearly basis, and has the potential to increase by 30% over the next few years.
Adam Roseman of ARC China explained in a newsletter that “the turnover of the nation’s online high-end brands hit an unprecedented 10.73 billion yuan last year, surging sharply by 68.8% compared wuth 2010’s sum of 6.36 billion yuan, according to findings released by the Internet analysis research company iResearch Inc.
The market will continue to increase at a speed of 30% over the next few years, which mean the turnover is likely to hit 37.24 billion yuan by 2015, said the report.
Revenues generated by the luxury goods’ direct-sales stores on the Internet were not included in the turnover.”
Shares of alibab.com have seem some significant growth in Hong Kong over the past few weeks. Adam Roseman of ARC China explains that this is a result of optimism regarding the company’s privatization plan.
In a newsletter, Roseman wrote: “Alibaba’s offer to make private its Hong Kong-listed arm Alibaba.com for 13.5 Jong Kong dollars per share, which is on par with the price when the business-to-business portal went public in late 2007, represents a 60.4% premium over the company’s latest 60-day average closing price.
“Analysts expect the privatization to go ahead because of the high premium, fragmented minority shareholders, and the prospect of continuing earnings and share price weakness. Alibaba Group holds 73% of the unit’s shares, and among the largest independent shareholders are Morgan Stanley, Vanguard Group and Capital International.”
Adam Roseman, founder of ARC China, recently discussed China’s consumer industry in a newsletter article.
“China’s consumer sector is something of a defensive play,” he wrote. “But DBS Group Research claims that the consumer sector provides ‘beauty of both sides.’ To the somewhat poetic DBS analysts consumer companies offer ‘better resilience during the harsh times as well as fruitful returns whenever skies clear again.’
“More practically, the Chinese government favors rebalancing economic growth toward consumption. To that end, it is pursuing policies that increase the minimum wage, limit individual medical costs, accelerate urbanization with new transportation systems, and build millions of units of affordable housing.”
In a company newsletter, ARC China’s Adam Roseman discussed Jim O’Neill’s outlook on the Chinese economy in comparison to that of analysts of the region.
According to O’Neill, China’s growth in the fourth quarter was indeed slowly than that of previous years, but still exceeded the expectations of numerous experts who predicted a “hard landing” for the economy in 2012.
Roseman writes that “China’s economy grew 8.9% in the fourth quarter from a year earlier, the statistics bureau said in Beijing. That exceeded the 8.7% median estimate of 26 economists surveyed by Bloomberg News and is above the 8% that signals a ‘soft landing’ for China, according to SinoPac Financial Holdings Co.”
The article explains that O’Neill believes the overheated property market is China’s main economic problem. Still, China’s policy makers have been able to reduce the issue by closing in on monetary policy.
The recovery of China’s hotel industry has increased over the last few years, according to a newsletter article by Adam Roseman of ARC China. Many executives feel that China is a haven for luxury hotels.
“We haven’t felt the crisis that they are experiencing in the U.S. and Europe,” said Charlie Dang of Starwood Hotels and Resorts Worldwide. “The domestic economy is still very strong. Generally the second and third tier cities are growing rapidly and that helps our business.”
In general, the Chinese have been boosting the luxury markets recently. According to department store Harvey Nichols, Chinese shoppers increased the store’s December post-tax annual profits by 32%.
Selfridges, another luxury department store in London, has begun accepting payments via China UnionPay cards as a result of the trend.
Audi, the Volkswagen subsidiary, recently announced a 37% increase since last year, having sold 313,036 vehicles in China. 2011’s results reveal that China has become the company’s largest market in the world.
In a newsletter for ARC China, Adam Roseman quotes Audi’s Peter Schwarzenbauer:”The numbers have exceeded our expectations again.”
Schwarzenbauer added that the company plans to continue developing within China. Last month, Audi shared its plans to build another factory in Guangdong province. The company hopes that the factory will begin operating next year, to manufacture between 150,000-200,000 new cars every year.
According to a newsletter article by ARC China’s Adam Roseman, consumers beyond China are unfamiliar with Chinese brands.
Millward Brown and WPP went over the facts and found that 83% of consumers outside of China have not heard of or don’t remember the name of a single Chinese business.
The newsletter writes, according to Adrian Gonzalez, that “that message is significant, given that China wants badly to create its own global brands… Chinese companies like appliance maker Haier and computer electronic company Lenovo that aspire to be global household names will need to better distinguish themselves to become more recognizable to the world’s consumers.”
According to a newsletter article by Adam Roseman, Nestle, the Swiss food company, recently announced plans to buy 60% of Hsu Fu Chi in a deal worth 3.5 billion Singapore dollars. The transaction allows Nestle to open new opportunities and styles, as well as cater to local tastes.
“China is now saying that it’s open to multinational companies,” explained Frank Schoneveld of McDermott Will & Emery.
He added that antitrust authorities have said that as foreign companies get closer to acquiring Chinese brands or consumer companies, challenges will heighten.
Marc Waha of Norton Rose added “China’s regulators are now attempting to present a level playing field for foreign and domestic companies.”
In a newsletter article, Adam Roseman of ARC China discussed China’s approach to Western infrastructure. He wrote that according to Lou Jiwei, chairman of China Investment Corporation, the organization plans to invest in the run-down infrastructure of developed countries around the world. The fund intends to begin with buildings in the UK.
The Chinese fund “is keen to team up with fund managers or participate through a public-private partnership in the UK infrastructure sector as an equity investor,” Lou wrote in the Financial Times. “We at CIC believe that such an investment, guided by commercial principles, offers the chance of a win-win solution for all.”
Roseman explained in the newsletter: “The British government is looking to UK pension funds and sovereign wealth funds in the Middle East and Asia to help finance upgrades of roads, railways, ports and social housing.