Temasek Holdings Pte’s plan to buy a stake in the retail arm of billionaire Li Ka-shing’s Hutchison Whampoa Ltd. will help the investment firm extend its reach in China and ease its reliance on the nation’s banks.
Singapore’s state-owned investment company agreed on March 21 to buy 25 percent of A.S. Watson & Co. for HK$44 billion ($5.7 billion), marking its biggest acquisition based on data compiled by Bloomberg. The health and beauty chain has stores in more than 20 Chinese cities including Shanghai and Beijing, according to its website.
“Acquisitions like this one were highly overdue to balance out Temasek’s heavy exposure to the financial industry, especially to Chinese banks,” said Sven Behrendt, managing director at Geneva-based GeoEconomica, which researches sovereign wealth funds. “We shouldn’t forget that China’s banks currently have problems. In that respect, the deal really is positive for the portfolio of Temasek.”
Temasek, the biggest foreign investor in China’s largest banks, has stakes in Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. valued at $16.5 billion, according to data compiled by Bloomberg. The country’s top four lenders are poised to report the slowest profit growth since the 2008 financial crisis amid surging bad loans and more competition, according to analyst estimates.
Financial services made up 31 percent of Temasek’s S$215 billion ($169 billion) holdings as of March 2013, the most among six groups. The category that includes consumer and real estate accounted for 12 percent, according to its website.
Hutchison shares fell the most in more than two years as the stake sale indicated a valuation that was lower than expected, according to analysts at JPMorgan Chase & Co., Credit Suisse Group AG and Morgan Stanley. Hutchison dropped 5.1 percent to HK$101.60 at the close in Hong Kong, the biggest decline since October 2011.
The Watson investment comes a week after a Temasek unit offered to buy control of Singapore’s Olam International Ltd., one of the world’s top three coffee and rice traders, for $3.2 billion.
China’s four-biggest lenders, which also include Agricultural Bank of China Ltd., are trading at close to the lowest valuations on record in Hong Kong trading. Valuations for the the MSCI China Financials Index dropped to an almost decade low versus the global industry benchmark while the market value of ICBC, the nation’s largest lender, fell below net assets for the first time on March 12.
The state-controlled banks known as China’s Big Four are getting squeezed by slower economic growth and rising bad debts just as policy makers open up the nation’s financial system to non-government competitors. Their shares have lost about $70 billion of value this year, equivalent to the size of New Zealand’s entire stock market, even as U.S. and European peers rally. Wells Fargo & Co. and JPMorgan Chase & Co. have knocked ICBC from its ranking as the world’s biggest bank by value.
“They are overexposed to the Chinese banking sector,” said Enrico Soddu, an analyst at the London-based Institutional Investor’s Sovereign Wealth Center. “On the other hand, as they are opportunistic investors, if the right deal came their way, they wouldn’t shy away from buying.”
Temasek has said it expects more investment opportunities in China. In October, it appointed Wu Yibing, the former chief executive officer of the direct investment arm of Citic Securities Co., as its China head. Wu succeeded Ding Wei. who held the position since February 2011 and took on the role of advisory senior director for China.
“We continue to believe in the growth opportunities and long-term prospects of Asia, particularly China,” Chia Song Hwee, Temasek’s head of investment group and co-head for China, said in a March 21 statement announcing the acquisition. “The consumer retail sector is a good proxy to growing middle-income populations and transforming economies.”
Temasek has made smaller investments in Chinese companies. China Huiyuan Juice Group Ltd., the country’s biggest juice maker by market share, said last week it issued $150 million of convertible bonds to a unit of the Singapore company. Temasek was also one of the investors in a $100 million financing round in TutorGroup, a provider of online learning software, according to a company statement last month.
With the Watson investment, Temasek will appoint two directors at Watson’s board, said Li, who wouldn’t rule out the Singapore company increasing its stake in the future. The 85-year-old Li ranks 22nd on the Bloomberg Billionaires Index with a net worth of $29.3 billion.
The companies plan to list Watson in two to three years in Hong Kong and Singapore, Li said at the March 21 briefing, less than a month after saying it planned an IPO this year.
Watson is Hutchison’s biggest unit by sales with health and beauty stores and groceries such as Hong Kong’s ParknShop. Watson’s net income grew to HK$7.8 billion in 2013, from HK$6.9 billion a year ago, Hutchison said in the March 21 statement.
China’s health and beauty retail market was worth about 915 billion yuan ($147 billion) last year, according to data from Euromonitor.
“They are killing two birds with one stone by both investing in China and by investing in a consumer-related company,” GeoEconomica’s Behrendt said. “In that respect, the deal definitely fits their strategy.”