Road Towards RMB 100 Billion Market Cap -- Consolidation and M&As Among Sector Bellwethers


YOU Yiyang, Vice President of JD Capital. This article is an excerpt from his speech delivered on JD Capital 2016 Annual Meeting on May 26, 2016. 

For starters, I would like to express my thanks to all distinguished guests and investors for their trust in us and for attending our Annual Meeting. My speech is: Road Towards RMB 100 Billion Market Cap -- Consolidation and M&As Among Sector Bellwethers.

Introduction: M&A -- The Only Way to Make It Big

As early as in 1982, George Joseph Stigler, a Nobel Prize winner in economics, concluded from a longitudinal study of the top 500 US companies that: None of them could grow stronger without mergers of any kind or simply through organic growth.

A company can normally grow stronger through organic growth or external expansion. Globally speaking, M&A might be the best choice for external expansion and is now also the key growth driver for companies both at home and abroad. For multinationals in the US, 90% were once involved in domestic M&As and 70% in cross-border ones. Many well-known Fortune Global 500 companies like Walmart (the world’s largest retailer), P&G (the world’s largest daily chemical brand) and Mobil Oil (one of the world’s largest petroleum producers) made their way into the first place through multiple M&As. 

Though many of us might be familiar with the name of Walmart, with its blue logo never changed, the company has actually made multiple large takeovers. In the 1990s, it became the largest retailer in Canada after it bought 120 local stores. In 2000, it became the largest retailer in Mexico by doing the same. Walmart also acquired many supermarkets in China before the 2008 financial crisis and further consolidated after the crisis. With all these efforts, it completed its online/offline retail deployment in China. 

Ⅰ. Global Companies’ M&A History

Walmart is not alone in global M&As and restructuring. Let’s have a review on the trend of global M&As.

1. An overview of global M&As

The global M&A went through four phases and each of them showed different historical features.

The first phase is from late 1990s to first 20 years of the 20th century, when M&As were mostly made by JP. Morgan.

The second is during America’s economic recovery after World War II (1960s~1980s), when US companies took the stage. 

The third is upon the start of Internet/globalization era, which also gave rise to large numbers of multinationals. Plenty of cross-border M&As began to emerge amid global economic integration. 

The fourth is after the financial crisis that hit the world in 2008. The tightened financial regulations boosted a round of industry consolidation led by financial enterprises. 

Each new phase of M&As appeared to surpass the previous one in terms of both size and scale. From a perspective of the industry’s long-term development, the M&A booms all happened for a reason. As a matter of fact, it is largely a result of economic resurgence, and corresponds with the economic cycle in a dynamic way. In the longer term, we see that technical revolution and population expansion are the two major drivers behind economic growth, which in turn spur corporate demand for M&As.

In recent years, the cross-border M&A previously dominated by US companies has now become a worldwide trend. Upon the end of 2008 financial crisis, Chinese firms started to eye opportunities outside China. M&A cases, such as Wanda’s acquisition of Legendary Pictures last year, are setting new records for overseas M&A. 

2. A review of the four global M&A booms

The first boom was half horizontal and half vertical. In the first half, the outbreak of the first financial crisis caused such a huge loss that milk was poured into sea in capitalist countries. Just when many companies suffered serious loss, JP Morgan consolidated the steel sector, which was later known as United States Steel. Back then, over 2,000 M&A cases happened in the US. As the end of World War I brought vertical M&As into the picture, international giants like IBM and GM began to rise. At that time, GM established its presence along the whole value chain, making it able to produce almost all auto parts. 

The second boom occurred after World War II when the US economy took off in the 1960s and 1980s. The US witnessed nearly 20,000 corporate M&As in the 1960s while many comprehensive companies came into being. From the 1970s onwards, the capital market became the key battlefield for M&As and witnessed the first hostile takeover in history. 

In the 1980s, PE institutions came on stage in global M&As and giants started to target other giants. Through leverage financing, these institutions acquired lots of super large companies, which would then be disposed after earnings recovered on improved operation and management. 

The rise of Internet technology in the 1990s and global economic integration contributed to the third boom. The M&A volume peaked at USD 2.5 trillion before the financial crisis in 1998, an increase of around 50% from last year; Pfizer Pharmaceuticals acquired a major pharmaceutical company in the US for USD 100 billion. The cross-border M&As brought huge changes to the sector’s competition pattern. For the auto sector, Benz’s acquisition of Chrysler and Ford’s acquisition of Volvo rewrote the competition landscape, cutting the number of market players from ten to eight and then six. The boom in M&As drove the corporate upgrading as well as the global economic integration. 

The fourth boom came after the 2008 financial crisis ended. With cross-sector operation proved to be impractical and the regulations on finance tightened, the mass M&As among US financial institutions became dominant ones in this stage. In the meantime, Chinese companies made their first real move to go global by participating in key overseas takeovers via financing arrangements. In 2008, Chinese enterprises formally initiated their cross-border M&As. 

Ⅱ. China’s Trans-national Enterprises’ M&A History

From the mid to late 1980s, M&As have developed for 20~30 years in China.

Prior to the 1990s, China was still in the early stage of M&A, where government played a dominant role. Back then, many company operators became owners after being acquired and it boosted China’s economic growth over next three decades, especially for private enterprises. 

Following the establishment of Shenzhen Stock Exchange (SSE) in the 1990s, the SSE-listed Baoan Group acquired Founder Technology (then known as Yanzhong Industry) in the secondary market, marking the start of acquisitions among listed companies in China. Since then, the M&As expanded from SOEs to companies with other ownership structures and cross-sector/regional M&As also began to emerge. 

Some might say that it only took China 30 years to go through the development process that took capitalist countries 100~200 years. In fact, China’s M&A market also spent 30 years achieving what US capital market achieved after 120 years of development. Over the past decade, China’s economy was at the late stage of industrialization when M&As were mostly horizontal ones. The statistics show that horizontal acquisition took up 60% of China’s total domestic acquisitions over the past decade. Meanwhile, China is at a critical stage of industrial upgrading with outdated capacity and enterprises being crowded out. Some listed companies and industrial groups are seeking new industries to bring new vigor, just like what the US M&A market went through in its phase three/four transformation. Therefore, we may conclude that it just took China 30 years to achieve what the US achieved after 120 years of growth. 

Since 2015, Chinese companies have accelerated their pace in overseas acquisition. In 2015, the global M&A volume totaled USD 4.5 trillion, in which China has become a new driving force by leading M&As with a volume of over USD 1 trillion in Asia Pacific. Moreover, Chinese companies have also made great efforts in overseas investment by investing over USD 100 billion abroad in 2015 (>USD 40 billion in 1Q16), mostly contributed by significant increases in the volume of acquisitions. 

III. Case Sharing: PM’s Growth with M&A

Another case is about the Altria Group, previously called Philip Morris. While such a name may sound unfamiliar to you, its sub-brand, Marlboro, is definitely much more well known.

The Altria Group supplies over 900 billion cigarettes for smokers around the world, which can surround the globe for numerous times if connected. Being more than a cigarette company and the previous owner of Kraft Foods, it is also currently the world’s second largest beer producer, and potentially a key shareholder of the largest one. The total sales of companies within its system and its incubated ones have exceeded USD 150 billion.

The interesting thing about Altria Group is that it had been the bench-marking company in several rounds of M&A in the US. In this industry, it initiated the M&A of Congress, a cigarette company, in 1959 and the acquisition of the international business of the Liggett group, which secured the franchise rights of several overseas brands. In 1981, it developed into the world’s largest cigarette group by acquiring 50% of the share of another peer company. Its entered into the Indonesian market in 2005, when it merged Hanjaya Mandala Sampoerna, the third largest tobacco company there.

Besides M&A within its own field, the company was also engaged in mass cross-industry M&A, among which typical cases include the acquisition of General Foods in 1985 and of Kraft Foods in 1988. Apart from Maxwell Coffee, the two companies also had many other famous brands, including Chips Ahoy and Oreo. Through M&A, the company gradually expanded its business scope.

It is well worth mentioning that when it acquired Miller Beer in 1959, the latter only ranked 8th in the US, with a market share of less than 5%. Thanks to his outstanding marketing capabilities in cigarette business, Philip Morris developed the company into the second largest beer producer in the US. Later, South Africa Breweries acquired the company and established SABMiller, now the world’s second largest beer company with its share price constantly rising.

Last October, the world’s largest beer company, InBev, sent an invitation to SABMiller in a bid to merge two companies into the largest brewery through M&A. If such transaction is completed, then Snow Beer and Harbin Beer may both be turned into products of the former Philip Morris Co. Meanwhile, the business of Philip Morris has been expanded to real estate and finance as well.

Now, the initial Philip Morris has grown into four large-scale groups and became the second largest food company in the world. It was through continuous overseas M&As that the company had realized market expansion and income growth and become an industrial leader. With 7 out of 15 top tobacco brands worldwide, it has become the top tobacco producer and the second largest beer producer. The M&A history of this company has been an everlasting legend in the US capital market.

IV. Approach to Reap A Market Value of 100-Billion-Yuan for Chinese Private Enterprises

According to statistics, by May 12, 2016, there are 47 enterprises with a market value of over RMB 100 billion on China’s A-share market, with an additional one if the NEEQ is also considered. Among these, there are only 6 private ones, around only 10% of all. In contrast, over 80% are central and local state-owned enterprises. As for their industrial distribution, there are only 10 manufacturing enterprises, which is way fewer than financial service companies, accounting for over 50%. However, it is still believed that as the high-speed growth of Chinese private enterprises continues, the ratio of private enterprises shall gradually increase even to the same level to that of SMEs.

People are concerned about the valuation of companies with a market value of over RMB100 billion. In fact, their valuations are not as high as expected. The valuations of 38 companies, 70% of the total, are lower than 20 times of their respective P/E ratio. Therefore, it is essentially an illusion for enterprises with market value of over RMB 100 billion to get a very high valuation. The only possible way is to be practical, and create value continuously for investors and shareholders worldwide.

Statistics have shown that virtually all enterprises with a market value of over RMB 100 billion on China’s A-share market are well-known. Wens Food, China’s largest agricultural enterprise, provides hundreds of millions of pigs for Chinese people annually. Midea Group, China’s leading enterprise of small household appliances, has a profit of RMB 10 billion and market value of around RMB 100 billion. Focus media, the first company returning to the A-share market, realized back-door listing and earned a profit of RMB 4 billion last year. Its market value has reached RMB 100 billion. BYD, China’s leading producer of electric automobile and supplier of new energy, generated sales of over RMB 80 billion with its profit standing at RMB 3 billion.

It can be observed that the valuations of companies with market value of over RMB 100 billion on the A-share market are not exceptionally high. According to a survey, two basic requirements should be met to bring the market value to RMB 100 billion: net assets worth RMB 30-50 billion and profit of RMB 3-5 billion are marginally sufficient for a well-recognized market value of over RMB 100 billion in the long run. To achieve this, the actual controller and management team of these listed companies should make continuous efforts in M&A and financing, and scale up their business.

V. Concept and Practices of JD Capital’s M&A

1. Concept of JD Capital’s M&A: a trilogy

Objectively speaking, JD Capital’s M&A is both new to the capital market and to China’s M&A market. Such a process involved three stages:

The first stage is transition, whose central idea is to turn companies with lower market value into those with higher market value that can promote industrial integration.

The second stage is upgrading, which refers to assisting enterprises to expand their business scope and become versatile industrial groups, when investment and M&A covering the whole industry chain can also be realized.

The third stage focuses on a core strategy, i.e. making great leaps forward in the the market value of the leading companies in industry segments.

2. JD Capital’s M&A practice

We have been continuously engaged in M&A practices.

CHSR, previously named Baolilai, used to manage a five-star hotel in Shenzhen. Its main assets included a 100,000-m2 five-star hotel and properties for rental. As one of China’s eight companies listed in Shenzhen, it changed its name and main business for numerous times, and finally became the so-called shell resource, or shell enterprise. Later, the successful merger of Sheenline Technology, which was once invested by JD, signified its transition of its major business from hotel and catering to rail transit, from a gloomy industry to a high-growth industry. Since 2014, JD Capital has been deeply involved in both rounds of asset reorganization of CHSR and demonstrated its strong capability in industrial integration.

After merging Sheenline Technology into a listed company and realized the transition of the latter’s main business in 2014, JD Capital further assisted listed companies to acquire Micro Union and Leaddo to further expand its business layout. Within two years, the CHSR has been successfully transformed into a high-speed rail maintenance enterprise that is also involved in the industry of communication signals. Meanwhile, its market value increased from RMB 2 billion to roughly RMB 30 billion, creating remarkable value for shareholders and sound return for investors.

Utour is China’s only private travel agency listed on the market in 2014. At that time, its business income was about RMB 3.5 billion, in which 80% came from outbound tours. In 2015, JD Capital joined Utour investing in Club Med. As a result, Club Med gained channel resources in the upper section of the industry chain, which boosted its expansion in China. Besides, Utour also acquired overseas targets, such as Kaytrip, to get the access to local life service platforms.

In 2016, through involving in Luolai’s 510-million, three-year private placement, JD Capital will contribute to its transition from a traditional seller of home textiles to a brand retailer of integrated home appliances. In the future, JD Capital is also going to help the enterprise to make great strides through M&A with outstanding companies both at home and abroad.

3. JD Capital’s future M&A investment strategy

JD Capital hopes to help its clients to become China’s top enterprises, bring their market value to 10 billion, 30 billion or even 100 billion yuan, and bring considerable returns to investors through exploring investment opportunities in sub-fields high-speed growth and conducting a series of M&As.

In the past, JD Capital accumulated 20,000 target enterprises and conducted due diligence in 3,000 enterprises. During this process, JD Capital acquired abundant experience in industrial investment, as well as data regarding industrial competition and profitability. Therefore, it is confident in cooperating with leading enterprises and listed companies, and carrying out M&A worldwide in eight fields in which it has competitive edges: consumer services and agriculture, health and life sciences, advanced manufacturing, energy and bulk commodities, environment and public utility, finance and real estate, TMT and war industry.

In the process of cooperating with leading companies, we are to set up specialized division-making committee composed of senior executives, corporate senior executives and industrial experts to provide basis for and facilitate decision-making in important M&A cases, and help them make significant leaps.

4. JD Capital’s future M&A objective

JD Capital will take full advantage of its over 20,000 project reserves and nearly 3,000 invested enterprises to find out proper M&A opportunities.

Meanwhile, JD Capital is to utilize its abundant domestic channels and its improving overseas M&A channels to build up its capacity of continuously securing and seeking overseas projects. Channels for exploring M&A targets will be established in Europe, US and Japan to help outstanding enterprises all over China with M&A opportunities overseas.

VI. JD Capital’s “Post-M&A” Outlook

In fact, asset delivery is just the beginning of an M&A transaction, rather than the end. The failure of numerous M&As at home and abroad is not down to whether the transaction can be completed; instead, what matters is whether the integration can be successful.

Meantime, we explore the underlying reasons and logic behind each M&A case with respect and care, and the “perception of value” is always deemed as the major hindrance for M&As.

In JD’s point of view, the integration of corporate cultures and teams serveS as the soul of M&As. Even excellent enterprises suffer setbacks in M&As due to cultural shocks and problems of integration. For example, after Google acquired another well-known Californian enterprise in 2014, many senior executives of the acquired left office and sold their shares within one year. Therefore, M&A is just a beginning. What’s more important is the integration and blending of values and teams in the enterprise.