Retail, health prove attractive to overseas investors
Overseas acquisitions by Chinese buyers are cooling after two record years as the Chinese government reins in capital outflows, but deals into China are on the rise, and new rules will make it easier for foreign buyers to tap China's giant consumer potential.
Inbound M&A deals have reached $7.1 billion so far in 2017, almost double the amount in the same period last year, and they are well on track to beat the 2016 total of $46 billion, while outbound deals tumbled more than 40 percent to $8.4 billion, according to Thomson Reuters data.
Deals in retail and consumer staples accounted for nearly half those early transactions, far outpacing real estate and financial deals, which usually dominate inbound M&A.
Belgian investment firm Verlinvest is ahead of the trend. It set up a $300 million venture in 2016 with State-owned conglomerate China Resources and has already deployed more than half of the funds.
Verlinvest, which manages funds for the founding families of Anheuser-Busch InBev, is investing in minority and majority stakes in leading Western brands so it can push them through China Resources' distribution channels in China, said Nicholas Cator, who is responsible for the company's Asia business.
"We're going to be focusing on those high-growth sectors that are based on consumer trends, like health-related food and beverage products, healthcare, education, cinema or entertainment, or anything linked to any kind of cultural production or content," he said.
Verlinvest's joint venture in December bought an undisclosed stake in Oatly, a Swedish maker of dairy-free products, and plans to expand it into China, and in November it bought a majority stake in Red Sun Enterprise, which owns senior care homes in Shanghai and Nanjing, East China's Jiangsu Province.
The Chinese central government has long been trying to rebalance the economy away from infrastructure, heavy industry and export-led growth and toward domestic consumption.
After a trial in a few of its free-trade zones, China in October expanded to the entire country a new liberalization program.
Apart from a "negative list" of industries deemed too sensitive, foreign investments no longer need to go through a cumbersome approval system, and there has even been some loosening in the off-limits list.
The biggest problem, according to David Cogman, a principal focusing on China at consulting firm McKinsey & Co, is the lofty valuations for Chinese assets.
Consumption and services companies listed in Shenzhen and Shanghai trade at about 30 times their earnings, compared with a multiple of 17 for similar companies trading in Hong Kong and about 20 for US-listed companies, Thomson Reuters data showed.
"At the end of the day, particularly if you're a fund looking across multiple markets, your investment committees still have to think where to put the capital and that's hard to do with the current numbers you see in China," he said.
