Dhanin Chearavanont ran into some of the toughest times of his life in 1998. His firm Charoen Pokphand Group was on the verge of bankruptcy as Thailand’s economy buckled in the wake of the Asian financial crisis. But even during the worst of the liquidity crunch the Thai, who is ethnically Chinese and known as Chia Kok Min in his ancestral home, refused to sell his long-term investments in the China market. Indeed he upped the ante, building his $400 million Super Brand Mall in Shanghai in the same year. He preferred instead to divest the Lotus retail chain – a flagship unit in Thailand he once described as his “beloved baby” – to Tesco for a mere $180 million.
Chia reclaimed his Thai retail unit earlier this year after completing a $10.6 billion buyback of Tesco’s Thailand business and rebranding the hypermarket chain with its original name. And now the time seems finally ripe for the Thai billionaire to sell part of his business empire in China via a bumper IPO.
What is the IPO candidate?
CP Pokphand has been listed in Hong Kong since 1988 but investor interest in Chia’s agribusiness has never been huge. In recent years the pig feed maker has traded at a market value below HK$18 billion ($2.3 billion), even as dividend yields reached more than 10%.
A connected transaction with the unlisted parent stirred more interest in the group, however. CP said in a stock exchange circular last September that its fully-owned unit Chia Tai Investment (CTI) would be buying the hog-farming business from its controlling shareholder in a deal valued at Rmb28.1 billion ($4.1 billion). This consideration was financed by the sale of new shares in CTI to the Chia family. This reduced CP’s ownership in CTI to 35% from 100% as a result.
CP explained at the time that rising pork demand and shortages of hogs had made China’s swine business into a much more attractive market worth around $200 billion. The restructuring of CTI created a vertically integrated player with businesses encompassing feed milling, pig farming and food processing.
It’s clear that the move was also made to pave the way for an A-share listing. Last December CTI obtained regulatory approval to go public on the Shanghai Stock Exchange’s main board. Preparations for the IPO gathered pace as the company published a listing prospectus last week, announcing plans to raise about Rmb15 billion through a sale of about 12% of CTI’s shares. It is set to be valued at around Rmb125 billion – or three times the combined value of its parent firm CP and the Chinese pig farming business it acquired from Chia in September last year.
What is CTI’s growth engine?
Several of CTI’s major competitors in the pig farming sector have already gone public. Sichuan-based New Hope Group’s vertically integrated agribusiness is now a close rival. Like CP, New Hope was also founded by four brothers (see WiC543), although New Hope was a cash-strapped start-up when the Thai firm intially enjoyed near-monopoly status in the animal feed market in early 1980s.
CTI bred 3.5 million hogs in 2019, which ranked it fifth in China’s vast market. Wens Foodstuffs was the runaway leader, selling 18.5 million pigs in the same year, while another Shenzhen-listed firm Muyuan was second with about 10 million hogs.
CTI’s initial public offering comes at a time when all the major pork producers have been pouring billions of yuan into new farms after a disastrous swine flu, beginning in 2018, wiped out more than half of the hog herd.
Many of the new facilities are designed as multi-storey buildings, with production processes supported by AI and facial recognition technology. And with government encouragement, the larger players are set to grow even larger. Before 2010 small pig farms dominated the industry and bigger producers such as Wens, Muyuan and New Hope accounted for 35% of the market. That percentage increased to 52% in 2019, with the authorities wanting the ratio to rise to 65% by 2025.
A more consolidated market should stabilise pork prices by bringing more predictable supply. Commitments to investment at larger, higher-yielding farms are also seen as less vulnerable to fluctuations in demand or the impact of natural disasters. For instance, many minor farmers are struggling financially at the moment because of falling pork prices, following a recent expansion in production facilities. Xinhua reported this week that pork prices have fallen nearly 60% year-on-year. The 23% decline in prices in May was a key contributor in holding down China’s consumer price index, which climbed just 1.3% in the same month year-on-year (by contrast, the producer price index rose 9% thanks to surging metal prices). The situation has forced the National Development and Reform Commission to step in again on Wednesday with a slew of measures to stabilise the market.
As larger competitors have scaled up they have also driven demand for CTI’s animal feed business. That segment contributed Rmb24 billion in revenue last year, or 53% of the group’s total.
Pig farming made up about 28% of CTI’s sales last year (compared with 15% in 2018) but it is also its fastest-growing segment. In fact, CTI says it is planning to invest the entirety of the Rmb15 billion IPO proceeds in 17 colossal new pig farms across China.
“The pig farming industry is set to enter an arms race in terms of production facilities. The market’s competitive landscape is set to be reshaped following the IPO and the expansion of Chia Tai Investment, which has been in the market for the longest time,” National Business Daily claimed in an article this month.
Why is Chia so favoured in Beijing?
CP was the first major player in China’s swine business. In 1979, when the market had been opened to private sector investment, the Thai group teamed up with US-based Continental Grain to produce animal feed in Shenzhen. It has been well-documented that the group was awarded the city’s “Foreign Investor Certificate No. 001”.
“When I first came to make a big investment in China, some people thought I was crazy. But I turned out to be right,” Chia told Xinhua.
Later the company partnered with international brands keen to grow their presence in China, acquiring the rights for 7-Eleven convenience stores and the KFC fast food restaurant chain. It manufactured motorcycles under licence from Honda and brewed beer under a deal with Heineken.
By the early 1990s it was already reporting more than 200 subsidiaries in mainland China
Many overseas Chinese entrepreneurs who started businesses in Shenzhen at the same time have left the stage. Even Hong Kong property tycoon Li Ka-shing – for decades dubbed Asia’s richest man – seems to have fallen foul of Beijing’s good will in recent years (see WiC205). Yet Chia has been able to keep the government’s trust for more than 40 years. He is arguably the most successful overseas Chinese investor in China. Including CTI, his CP group operates one of the biggest and most diversified conglomerates. In addition it is a major shareholder in two of China’s most powerful financial firms. In 2012 it acquired a 15% stake in Ping An from HSBC for more than HK$70 billion (that was Thailand’s largest M&A deal until Tesco’s sale of its Thai retail chain last year). In another mega deal in 2015, it forged a joint venture with Japanese trading house Itochu Corp and acquired a 20% stake in Hong Kong-listed Citic Limited for $10 billion.
When CP sold an 18% stake in its Thai telco True Group to China Mobile in 2014, the Wall Street Journal pondered whether Chia was “China’s man in Bangkok”. Last month there was further speculation as to whether the Thai government’s planned purchase of Chinese vaccines from Sinovac was swayed by Chia. CP was forced to publish a rare public statement clarifying its position, the Bangkok Post noted. The Thai group explained it was not a major shareholder of Sinovac, although it did own a minority stake in Sino Biopharmaceutical, which holds a 15% stake in a Sinovac unit. “The vaccine purchases were made at the government-to-government level and CP was not involved in any way,” the company insisted.
All hail the overseas Chinese?
Huashang Strategy (a publication that prints the biographies of leading businesspeople) thinks Chia’s success comes down to his longstanding ties with his ancestral homeland. “From being the first to invest in China to becoming one of the biggest foreign investors, Zhengda [CP’s company name in Chinese] has been the firmest believer in China’s economic reforms. It has also invested the most,” it claims, adding that Chia helped to found the China Overseas Chinese Entrepreneurs Association in 2008 and has served as the trade group’s chairman since then.
CTI is going public at a time when other ‘overseas Chinese’, or huaqiao, have pulled off some of the most successful IPOs in Shanghai and Shenzhen. Yihai Kerry, the biggest producer of cooking oil in China, which is controlled by Malaysian tycoon Robert Kuok, went public in Shenzhen last year and briefly became the most valuable firm on ChiNext, the city’s junior bourse (see WiC515).
Chinese leader Xi Jinping’s liking for overseas Chinese tycoons has not gone unnoticed either. In 2014 he praised them as “members of one big Chinese family”.
“They did not forget their fatherland, they did not forget their ancestral province, they did not forget that in their body there is Chinese blood,” he lauded. Last year when Xi visited the cities of Shantou and Chaozhou – an area that has produced some of the most affluent huaqiao, including the Chia family – he reaffirmed their contribution to China’s economic transformation and called on them to join new efforts “to realise the Chinese dream”.
Back in 2015 when CP and Japan’s Itochu jointly invested in Citic, we reported how the tie-up was aimed at improving linkages between Asian economies and noted how Citic might also serve as the “infantry” in facilitating Xi’s Belt and Road Initiative in the region.
“We live in a changing world and China is taking the lead of the changes,” Chia told Xinhua at the time.
A CP-led consortium including China Railway Construction Corp was later awarded the concession to build a railway linking three Thai airports, a key project in the so-called Eastern Economic Corridor, where the Thai government hopes to spur investment from Chinese tech giants like Alibaba Group and Huawei.
But the CP-Itochu-Citic triumvirate hasn’t worked out quite as intended. In 2018, Itochu went as far as writing down its investment in Citic, now viewed by analysts in Tokyo as a strategic blunder that has damaged the Japanese giant’s share price.
But are large Asian conglomerates like Itochu ‘oversold’ by the investor community? The answer might be ‘yes’, according to a certain Warren Buffett. Last September – when CP was paving the way for CTI’s A-share IPO – Berkshire Hathaway was revealed to have built 5% stakes in Japan’s five biggest sogo shosha, or general trading firms, including Itochu. Given Itochu’s business interests in China, some Chinese analysts then suggested that Buffett was de facto investing in the China market. Itochu is also the second biggest shareholder of CP Pokphand, having acquired a 23% stake in the Hong Kong-listed firm in 2014. Applying a similar logic, Buffett can be said to have also indirectly invested in CTI as well.
Ironically then, a successful IPO in Shanghai will increase the Sage of Omaha’s exposure to China, even as relations between Beijing and Washington remain strained.
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