Category: Finance

Private Equity Firm Invests in China Outfitters

Many eyes are on men’s casual wear companies at the moment in China. The global private equity firm KKR & Co L.P. has announced that it plans to invest US$60 million in the Hong Kong initial public offering of China Outfitters Holdings Ltd 1146.HK.

As David Liu, CEO of KKR Greater China, said,

“The menswear market in China has enormous growth potential. Market leaders such as China Outfitters have significant room to increase market share.”

Private equity firms have been moving more into the field of offering pre-IPO financing. This field, prior to the 2008 financial crisis, was almost exclusively filled with hedge funds.

China Outfitters has menswear manufacturing and sales locations in China, but also have a long list of foreign brands. Their foreign brands include JEEP, Santa Barbara, Polo & Racquet Club and London Fog. In China, they make and sell menswear.

Baby Business Booming in China

Those in the baby business should definitely take note of China’s family planning. According to the National Bureau of Statistics predictions, China will experience a massive population boom from 2005 through 2020, with the country’s birth rate peaking in 2016.

Even more significantly, many Chinese families will target 2012 as the year to have a child, as it’s the year of the dragon. This icon symbolizes power and wealth, and 5% more babies are born under the dragon than are born with any other symbol.

As Jessie Guo, Jefferies Group Inc.’s Hong Kong-based head for consumer research in Asia, recently said, “The baby boom is a good investment idea in the near term. The growth is likely to sustain for the next two to three years.”

Michele Mak, a consumer-sector analyst at BNP Paribas chimed in and said, “The dragon year baby boom is almost a sure thing, which will boost the demand for infant products such as baby formula, diapers and clothes.”

Many people still believe that China has a strict one-child policy; that policy from 1979 has been modified to accommodate for China’s aging labor force. Couples who are both only children are now being allowed to have two kids of their own; and rural couples whose first child is a girl older than four are also allowed to have another child.

With the rise in income, this is set to create a niche market for baby-food and baby-care products that many would be smart to be part of.

Chinese Study on Branding Shows Important Changes

Agency Millward Brown and media company WPP have recently looked into Chinese branding and consumer opinions. Looking at the 50 most valuable Chinese brands, they found that 83% of consumers outside of China couldn’t name a single Chinese brand or company.

China, of course, wants to create a global present, as Adrian Gonzalez, the head of Greater China at Millward Brown, explained. Chinese brands clearly need to do much more work to become distinguishable in the competitive marketplace internationally.

In China, however, the brand study found that, of the 35,000 consumers, Chinese brand value has grown to US$325 billion in the last year. This is a 16% increase from the previous year.

Gonzalez said that today, “We’re seeing in many cases now that foreign companies feel the best way to succeed in China now is through acquiring a Chinese company.” He pointed out that this was not the case previously.

The study also showed a significant change in the use of state-owned enterprises, as the study showed that “Government protectionism is starting to wear thin.” This is a dramatic contrast to the findings in the 2010 study. Half of the brands that were on the list that were less favorable with consumers were state-owned.

Nestle SA Acquires Stake in Yinlu

Nestle SA just finished acquiring a 60% stake in China’s Yinlu Foods Group, the company recently said in a statement.  After the acquisition, Chairman of Yinlu, Chen Qingyuan, will stay in charge of the join company in Xiamen.

The deal is still waiting for final approval from local governments that include governments in Fujian, Shandong and Hubei, but it has already received the approval from the Chinese Minister of Commerce.

The companies have announced that they plan to invest 2.4 million yuan ($395 million) in Yinlu which will aid in the production of new facilities and the expansion of existing ones.

Nestle SA’s goal with this investment is to double the amount of its investment in the Chinese coffee market within the next three years.  Yinlu had a 52.5% increase in its revenue in 2010, reported a revenue of 5.4 billion yuan. 

Nestle SA is also reportedly planning to purchase a 60% stake in the Chines candy maker Hsu Fu Chi International Ltd.

China’s Internet Retail Market Taking Off

According to the Boston Consulting Group Inc., China’s internet retail market may soon be overtaking the one in the U.S. as the world’s largest. In 2010, e-commerce sales in China were at 476 billion yuan, as compared to 128 billion yuan in 2008.

The report further estimated that 44% of city dwellers in China will shop on the Internet in 2015, while 23% did this past year.

As the consulting firm said, “Internet access has far outpaced the reach of the top physical retailers. China’s massive geography hampers the effectiveness of physical retailing.” China’s online retailers are also doing so well because China has incredibly low shipping costs ($1 on average for a 1-kilo parcel as compared to $6 in the U.S.). In addition, income is rising throughout China, helping retail sales to increase.

Chinese Manufacturers Looking Elsewhere

While most of us think of “Made in China” as a ubiquitous label, China is beginning to look elsewhere for its manufacturing needs. Labor costs in China have risen 15-20% each year for the past few years, causing many Chinese companies to look elsewhere.

Many companies, as a result, are looking to south-east Asia for their manufacturing needs. They are finding, however, that such a move is not simple since their supplier networks and their worker productivity is much better in China.

Profit margins have dropped considerably for Chinese manufacturers from a height of about 10% to a low of 3% currently. In addition, Beijing has made a decision that they will be doubling wages for factory workers by increasing minimum wage. They plan to continue doing so every year for the next few – perhaps causing more people to look elsewhere for their manufacturing needs.

Some companies are selecting to keep their bases in China, while also setting up shops elsewhere. They find it difficult to completely move away from China, however, As Dong Tao, an economist with Credit Suisse said, “There is no developing country that can match half the efficiency China offers.”

China is Getting Connected with 3G Mobile Phones

China is definitely plugged in. Their 3G mobile phone users list just reached 102 million by the end of September. Nearly half of these people, or 43.16 million, use the country’s self-developed TD-SCDMA standard. This according to the Ministry of Industry and Information Technology (MIIT).

The State Council’s Information Office recently held a press conference at which Xiao Chunquan, the director general of the Bureau of Operation Monitoring and Coordination of MIIT said that China’s telephone users hit 1.24 billion at September’s end.

Economic Development in Xinjiang Uygur

Two new economic development zones in China have recent been opened for more construction. The State Council, or China’s Cabinet, has unveiled guidelines allowing these areas in the western Xinjiang Uygur autonomous region to be further developed.

The specific zones including the Kashgar and Korgas economic development zones in western and southern Xinjiang will receive fiscal subsidies and tax preferences to help with construction in these areas.

The goal is for the central government to help these zones to develop as regional hubs for China’s opening up to other Asian countries as well as to Eastern Europe.
The plan is for the central government to offer a certain financial subsidy each year from 2011 through 2015. They will exempt qualified enterprises from business income taxes for five years and they will subsidize fixed-asset investments while offering government loans.

The government will also focus on the construction of the China-Kyrghyzstan-Uzbekistan railway and the China-Pakistan railway to facilitate this regional growth.

National Day Holiday in China Fuels Economy

China’s recent week-long National Day holiday which lasted from October 1 to October 7, 2011 was certainly good for the economy. Tourism revenue there reached 145.8 billion yuan ($22.94 billion), which is an increase of 25.1% year-on-year.

The most scenic locations in China got 302 million tourists, which was an 18.8% increase from the same time period last year, according to the National Tourism Administration (NTA) and the National Bureau of Statistics (NBS). The data even showed exactly what each tourist spent, on average during the week. Each tourist was recorded to have spent approximately 483 yuan during this holiday, which was an increase from the 459 yuan spent last year.