Japan’s Itochu and Thailand’s Charoen Pokphand Group (CP) are the latest in a string of overseas firms to deepen their relationship with China’s largest mainland conglomerate Citic Group following its Hong Kong unit's share sale last year.
Itochu and CP said on Tuesday they plan to buy 20% of Citic Group unit Citic Ltd for HK$80.3 billion ($10.4 billion) at HK$13.8 per share .
The manner in which Citic Group is restructuring and courting private investment is under intense scrutiny as the Beijing-headquartered conglomerate is widely viewed as the poster child for Chinese President Xi Jinping’s reform of sprawling state-owned enterprises.
CP, Thailand’s largest agricultural group, was one of 27 strategic investors in Citic Ltd’s (previously known as Citic Pacific) HK$53.4 billion ($6.9 billion) share placement. CP bought a 1% stake in Citic Ltd for $433 million during the placement.
Other foreign institutions - including the investment holding company of Qatar Investment Authority, Hong Kong-headquartered insurer AIA and Japanese megabank Mizuho - have followed up their investments in Citic Ltd’s placement with different kinds of tie-ups.
Foreign firms are keen to gain access to the fast-growing Chinese economy and piggy-back on state-owned Citic Group’s connections, which could greatly help ally risk in such an unpredictably regulated market as China.
Trading house Itochu’s investment marks the largest investment by a Japanese company in China. Japanese companies have been cautious about expansion in mainland China amid worries about corporate governance.
Given the size of Itochu’s investment it will be particularly keen to offset risk. “In our view [Itochu’s investment] represents a significant risk of asset overconcentration,” said Yasuhiro Narita, an analyst at Nomura in a research report.
Wider web
Citic Group’s widening web of overseas relationships illustrates how Chinese issuers are leveraging the marketing process of their share sales to help fuel overseas expansion.
The practice is an extension of Chinese concept of guanxi where relationships play an important role in business and life. It also belies some commentators' expectations that Xi's reforms of SOEs would take a more liberal, transparanent road.
Examples abound in recent years. After AIG bought $500 million worth of shares in PICC’s $3.6 billion Hong Kong listing they set up a nationwide joint venture to distribute insurance products. Los Angeles-headquartered Oaktree pledged $53 million in Cinda’s $2.5 billion Hong Kong IPO and at the same time inked a partnership to seek out opportunities in the mainland’s distressed asset industry.
The practice also partly explains how Citic Ltd. was able to place shares above the price at which its shares were trading in Hong Kong at the time.
QIA jumps on China train
The Qatar Investment Authority, one of the world’s largest sovereign wealth funds, jointly set up a fund of $10 billion to invest in China with Citic Group in November, less than three months after it bought $200 million worth of Citic Ltd’s shares.
Ahmad Bin Mohamed Al-Sayed, QIA's chief executive, said at the time that the new fund would look to invest in Citic Group's areas of strength such as infrastructure and property as well as healthcare and retail.
AIA, which invested $300 million in Citic Ltd’s shares, is selling insurance products via Citic Bank’s network, an arrangement known as bancassurance, according to people familiar with the arrangement.
Mizuho invested HK$780 million ($100 million) in Citic Ltd. It also secured a role as placing agency on the deal. During the share sale Mizuho signed a business alliance with Citic Group, strengthening cooperation between both parties as strategic partners across functions including banking, trust banking, and securities on a group basis.
Valuations
Normally large share sales are priced at a discount to public market valuations to ensure their success, however Citic Ltd was able to sell stock at HK$13.48 each, a 22% premium to the average closing price for the 30 consecutive trading days up to closing.
The fact that business alliances in some cases followed the investment partly explains why investors were willing to pay above market price and why Itochu is paying such a large sum.
"Unless joint operations with Citic can be brought to fruition, we doubt that near-term returns will be commensurate with Itochu’s outlay," said analyst Kazuhisa Mori at JP Morgan in a note.
Stock analysts caution that such investments and business tie-ups do not come without risk.
“Citic Group is engaged in a variety of industries, some of which have deteriorating externals—such as real estate and resource development,” said Nomura's Narita who also noted the possibility of impairment losses in the future.
Going forward, Citic Group’s securities affiliate Citic Securities is in the process of placing $4.5 billion worth of shares. It is likely to call on existing business relationships or start new ones to ensure the share sales success.
“Citic Securities deal will follow suit,” said a banker away from the deal. It is planning to issue 127.3% and 13.62% of the total issued H shares and the total issued shares of the company, and the completion of the deal must count on old relationships.
“Foreign investors value the following opportunities instead of profits from taking the shares,” said the banker.
