Tuesday, January 4, 2011

Wilmar's property foray - best to keep open mind

THERE is an adage that a company should concentrate on what it knows best. So it comes as no surprise that the market has cast a negative eye on palm oil giant Wilmar International's recent forays into the Chinese property market - two activities that are said to be as different as cheese and chalk. Some even worry that the move could be a signal of a bad spell in the group's core agri-business. However, it is premature for sceptics to write off the new ventures as, with the collaboration of experienced partners, they could well turn out to be a lucrative business.

Wilmar, which is headed by 'sugar king' Robert Kuok's nephew Kuok Khoon Hong, announced that it was entering the Chinese property market two weeks ago. It will pump in a maximum 889.2 million yuan (S$173 million) to develop three residential, commercial and hotel sites in China's Yingkou city. Its project partners are Shangri-La Asia (SA) and Hong Kong- listed Kerry Properties (KPL) - two companies that are related to Malaysia's Kuok Group. It followed up by announcing last Wednesday that it will enter into a joint bid with KPL and SA for six plots of land, also for residential, commercial and hotel developments in Yingkou city. This time, Wilmar will be investing up to 2.63 billion yuan.

The market's reaction to the deals has been largely negative. The day after the first announcement, Wilmar's shares, which some say have been correcting amid China's consumer price cooling measures, fell 5 per cent to $5.62. The stock was caught in a rut before recovering some lost ground, ending three cents higher at $5.66 yesterday amid bullish trading in the first market day of the new year.

Analysts appear to worry that the group has lost its business focus. Yet, it is not the first company to diversify from its core business. A good example, in the commodity sphere, would be The Straits Trading Company, whose core business was, and still is in tin smelting, but went into a whole host of other ventures in the late 1990s such as property holding and development and even media advertising.

Deciding factor

The point is, just because a company decides to dip its fingers into something else, doesn't mean that it has lost its focus. In fact, around the time that Wilmar first announced its foray into the Chinese property market, the group also said that it was partnering UK-based PZ Cussons plc - which is listed on the London Stock Exchange - to set up a palm oil refinery and food ingredients business in Nigeria, in which Wilmar will invest US$27.5 million. And it recently completed the acquisition of Australian raw sugar exporter Sucrogen Ltd for US$1.8 billion. Clearly, Wilmar remains very much focused on the agriculture front. The deciding factor to consider in this, and other cases, is whether the diversification would destroy, or enhance, shareholder value.

In Wilmar's case, there are several factors that could act in its favour. If there are fears that Wilmar is a stranger to the property business, then consider its partners. Both are seasoned real estate players. KPL, for one, is a long-standing player in the Chinese property market. Properties it holds include hotels, commercial and residential developments, with many a mix of the three. It has a presence in China's top cities such as Shanghai and Beijing, as well as cities such as Hangzhou, Tianjin and Chengdu. In KPL's fiscal year 2009, about 34 per cent, or HK$1.5 billion (S$247.6 million), of its net profit came from mainland China. Hong Kong and Singapore listed SA is also well-established in China, having developed numerous hotels there.

Experienced operators

Wilmar brings something to the venture too. Its role in the tie-ups, as stated by the group in its announcement last Wednesday, lies in 'sourcing of suitable sites and the implementation of the projects' in Yingkou city - where it currently has an oilseed- crushing plant. Having established its operations in Yingkou and other Chinese cities, its partners are hoping to ride on its network and knowledge in the country and expand further. In the words of Wilmar: 'The brand recognition of KPL's properties and SA's hotels, together with their expertise in operating and managing such properties, will further enhance the value of the joint venture.'

Right now, the market is taken up by the risks associated with the diversification. But if the ventures succeed, the returns could be substantial, given the potential of the Chinese market. Nothing should be taken for granted, obviously, but Wilmar has mitigated some of the risks by partnering companies which are experienced operators. It has a decent chance of succeeding. So while it might be hard to associate Wilmar with hotels, apartments and office buildings, don't be surprised if there's increasing mention of contributions from these non-core activities in future earnings reports. As in most things, it's best to keep an open mind, for now at least.

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