Chinese firms resume global dealmaking, as a top lender stalls

“The big state-owned lenders in China are essentially ‘GDP banks’—they will do anything to boost the GDP numbers.”

Key Takeaways:

• Anta and TCL are leading a new wave of foreign acquisitions to offset a soft domestic consumer market
• China Merchants Bank’s profit growth has flattened as it prioritizes loan quality over aggressive expansion in a low interest rate environment

By Doug Young & Rene Vanguestaine

We are witnessing two diverging narratives in China’s corporate landscape that, upon closer inspection, stem from the same root cause: a sluggish post-Covid economy. On one front, major Chinese consumer brands are looking outward, resuming a trend of purchasing foreign assets to secure growth that’s currently hard to find at home. On the other, the nation’s banking sector — represented by its most commercially oriented player — is turning inward, tapping the brakes on growth to navigate a landscape of squeezed margins and cautious borrowers.

We see these trends crystallized in recent moves by TCL (1070.HK) and Anta Sports (2020.HK), as well as the latest financial results from China Merchants Bank (3968.HK; 600036.SH). While one sector is seeking to buy its way into new markets, the other is hunkering down to weather the domestic storm.

A return to global shopping

The first trend marks a resurgence of Chinese companies acquiring foreign brands, a strategy that was hot in the first decade of the 21st century — epitomized by Lenovo’s (0992.HK) purchase of the PC business of IBM — but had largely disappeared over the last decade after mixed results.

Two significant deals have brought this strategy back into focus. First, TV giant TCL has taken over the home entertainment division of Sony (6758.T), a Japanese legend that has lost some of its luster. The two sides announced a joint venture to manufacture and sell products under both the Sony and Bravia brands. Second, up-and-coming sportswear giant Anta has purchased a 29% stake in Germany’s Puma (PUM.DE) from the Pinault family, becoming the brand’s largest single shareholder.

We believe these acquisitions are driven by strategic necessity. The Pinault family’s portfolio has underperformed recently, and Puma has consistently trailed its German competitor Adidas (ADS.DE) and American giant Nike (NKE.US). Furthermore, new challengers are rising, such as On (ONON.US), which boasts the backing of former tennis world number one Roger Federer.

However, the primary driver for the Chinese buyers appears to be the domestic environment. As we all know, the consumer economy in China is not performing extremely well. We are now in the fourth year post-Covid, yet the expected substantial bounce-back has not materialized. Despite government announcements regarding measures to improve consumption, the sector remains subdued. For companies like Anta, which has done reasonably well with past foreign acquisitions, buying into a global brand is a way to push for growth and revenues overseas when Chinese consumers are unwilling to spend.

We expect this to be the beginning of a bandwagon effect. In China, when a business move looks economically viable, imitators often follow. We have already heard rumors of names like Luckin (LKNCY.US) potentially looking at assets like Costa Coffee. If the domestic market remains soft, this new wave of outbound M&A is likely just getting started.

A bellwether bank turns cautious

While consumer brands look abroad, the domestic financial reality is starkly illustrated by the latest figures from China Merchants Bank. Generally considered one of China’s best-run lenders and a barometer for the sector, the bank is based in Shenzhen and is far more commercial than its state-owned peers.

The bank reported that profit growth came to a virtual standstill last year, rising just 1.2%. Operating income was even flatter, rising by a scant 0.01%. Most telling was that net interest income rose just 2%, lagging well behind a 5.4% rise in its loan book. This discrepancy highlights how the bank’s interest margin is being squeezed by the low-interest-rate environment — a policy the government likely wants to maintain to stimulate the economy.

We view these numbers as a sign of prudent management rather than failure. The bank appears to be navigating uncertain times by being extremely cautious about which new borrowers it brings on board. Expanding the client base too aggressively in this environment could lower the quality of its loan book.

Remarkably, the bank’s non-performing loan (NPL) ratio remained below 1%. While we often take the NPL ratios of China’s big state-owned banks with a grain of salt — viewing them as “GDP banks” that follow political directives and may hesitate to report bad news — we place more trust in China Merchants Bank. Its low NPL ratio likely reflects a strategic decision to limit exposure rather than statistical manipulation. However, it’s worth noting that expanding a loan portfolio can artificially depress NPL ratios in the short term, so time will tell if these figures hold. Ultimately, both the aggressive acquisitions by Anta and TCL and the defensive posture by China Merchants Bank tell the same story: China’s domestic economy is sputtering, and companies are adapting their strategies — either by leaving the country to find sales or tightening their belts to survive the squeeze.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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