Beauty parade: Watsons IPO could arm Li Ka-shing to extend China lead

Reuters

By Denny Thomas

HONG KONG, Oct 23 (Reuters) - Hong Kong tycoon Li Ka-shingis expected to use proceeds from what could be the world'sbiggest retail sector IPO to expand his health and beautybusiness in China - a market forecast to grow by around 40percent to $186 billion by 2015.

In the process, Li would aim that firepower against foreignrivals such as Mannings, controlled by Jardine Matheson Group'sDairy Farm International Holdings Ltd ; Alliance Boots,45 percent-owned by Walgreen Co, the biggest U.S.drugstore chain; and Vivo, part of China Resources EnterpriseLtd.

Billionaire Li's conglomerate Hutchison Whampoa Ltd last week scrapped the sale of ParknShop, its HongKong supermarket chain, and said it would carry out a strategicreview of A.S. Watson Co Ltd, its retail arm, which includesParknShop, the Watsons, Superdrug and Kruidvat personal carestores, Fortress electronic appliance outlets, and chainsselling food and wine and luxury and cosmetic products.

That review may include an initial public offering of all orparts of the business, it said, without elaborating..

Applying a 14 times multiple to last year's earnings beforeinterest, tax, depreciation and amortisation (EBITDA) of $1.64billion, an IPO could value A.S. Watson at about $23 billion,bankers and analysts estimate. If 25 percent of A.S. Watson isfloated - a standard Hong Kong IPO percentage - the IPO couldraise close to $6 billion.

Health, beauty and luxury retailing accounted for 82 percentof 2012 revenue at A.S. Watson, which has its roots in a smalldispensary set up in 1828 to provide free medical services tothe poor in the southern province of Guangdong.

"China's health and beauty retail industry is hugelyfragmented, and Watson has more room to grow," said John Chan,an analyst at Standard Chartered. "The biggest hurdle to growthwould be finding the right store location."

MARKET LEADER

A.S. Watson, which generated $19.2 billion in revenue lastyear from some 11,000 outlets worldwide, is already the marketleader in personal care in China - a fragmented landscape ofmainly small mom-and-pop stores where the top 10 firms controlless than 5 percent. A.S. Watson leads with just a 1.6 percentshare of the market that was last year worth $134 billion.

"China has been A.S. Watson's growth engine, and given thehuge growth opportunity and attractive returns, we would expectpart of any IPO proceeds to support the expansion of the Watsonsfranchise there," said Chan. Watsons is the brand under whichthe health and beauty retailing business operates.

Since 2008, it has tripled its China store count to 1,438,adding more than a store a day on average last year. Its Chinaoperating profit has grown four-fold to more than HK$3 billion($387 million) in that period. The business has a near-20percent operating margin.

By comparison, Mannings has said it plans to grow itsnetwork of stores across China, which stood at 187 last year,while Alliance Boots has struck two deals to expand in China,with one of its partners owning 500 retail stores. State-backedChina Resources owns 165 health and beauty Vivo stores in China.

China Resources declined to comment for this article. DairyFarm and Alliance Boots did not reply to emails seeking comment.

BIG DEAL

Li, dubbed "Superman" in Hong Kong's business centre becauseof his financial record - he built a sprawling ports-to-telecomsempire from a plastic flower business in the 1960s - istargeting fast growing lower-tier cities for his expansion plansacross China, said people familiar with the matter. A spokesmanfor Hutchison Whampoa declined to comment, noting only lastweek's statement mentioning the A.S. Watson strategic review.

China accounts for 24 percent of A.S. Watson's operatingprofit, but only 13 percent of its retail store count - twothirds of the group's stores are in Europe. Its China health andbeauty retailing business recorded 17 percent revenue growth in2012, the fastest among the group's geographies.

Western Europe's health and beauty retail market shrank 8percent last year and is forecast to grow just 4 percent by2015, to around $306 billion, Euromonitor forecasts.

"Certainly, growing organically in China makes a lot ofsense given the returns," said CLSA analyst Jonathan Galligan."They could also build more scale in Southeast Asia and youcould see them making acquisitions in retail space in Europe,something they haven't done in size since 2006."

If the strategic review does result in an offering of A.S.Watson stock, any deal of more than $6 billion would make itAsia Pacific's biggest IPO in three years, according to ThomsonReuters data.

The A.S. Watson review is the latest move by Li - ranked byForbes as the eighth richest person in the world, with a near$31 billion fortune - that some commentators have suggestedshows he is cutting his exposure to Hong Kong and freeing upcash to invest elsewhere. Last month, Li announced plans to listhis Hong Kong power assets in a deal that could raise about $5billion.

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