Investors know a good thing when they see one. When news of Wilmar International Ltd delaying the listing of its China operations in Hong Kong emerged, it put a dent in its share price but investors soon took the opportunity to buy on weakness, pushing the stock up. The China story is simply too attractive to resist.
Since venturing into the oilseeds business in China in the early 1990s, Wilmar has become the largest oilseed crusher, edible oil refiner and specialty fats and oleochemical producer in the country. Wilmar currently controls, by some estimates, up to 25% of China’s soyabean crushing capacity. With its extensive distribution network, it is also a leading producer of consumer pack edible oils in China, commanding around 50% of the market with its eight brands. China’s leading brand, Arawana, belongs to Wilmar.
China offers huge growth potential, given its population’s growing affluence and urbanisation. The country’s low edible oil consumption at 22kg a person, compared with 59kg and 55kg in Europe and the US, indicates ample room for growth in the demand for edible oils.
Indeed, China is a major contributor to Wilmar’s performance, accounting for close to half its US$14.3 billion (RM48.6 billion) revenue and around 40% of net profit in FY2008.
With the listing of Wilmar China Ltd, it is set to become the largest food-related play on the Hong Kong stock exchange with an estimated market capitalisation of HK$119.87 billion (RM52.5 billion), based on the 1.61% stake subscribed by members of the Kuok Group at HK$1.93 billion last month.
It is impressive indeed for a company that started in 1991 as a palm oil trading company to grow by leaps and bounds within a span of less than two decades. Wilmar was set up by Kuok Khoon Hong and his Indonesian partner Martua Sitorus. Khoon Hong, nephew of Malaysia’s “sugar king” Robert Kuok, had cut his teeth on the grains and edible oils business while working for his uncle at Kuok Oils & Grains Pte Ltd and also Federal Flour Mills Bhd before venturing out on his own, some say due to a difference of opinions between the two Kuoks.
According to its website, Wilmar quickly acquired oil palm plantation landbank in Western Sumatra and added two crushing plants and a refinery within its first year. It went on to acquire palm oil refining and milling plants in Malaysia as well as going further downstream into specialty fats. In 2000, it launched “Sania”, a cooking oil, for the Indonesian market.
In 2005, it acquired Indonesian-listed PT Cahaya Kalbar — which produces specialty oils and fats — accelerating its expansion in the specialty fats business. The following year, it completed the reverse takeover of Ezyhealth Asia Pacific Ltd in one of the largest corporate takeovers in Singapore and took over its listing status.
In the same year, the merger with Kuok Group’s oil palm plantation, edible oils, grains and related businesses comprising Kuok Oils & Grains, PGEO Group Sdn Bhd and PPB Oil Palms Bhd was announced. The US$2.7 billion deal was completed in 2007.
According to a source close to the company, the deal came about after Khoon Hong impressed his uncle with the back-door listing of Wilmar and they eventually decided to pool their resources to expand their businesses.
“Kuok Oils & Grains was already established in China. Then Wilmar also went into China. Before the merger, Wilmar and Kuok Oils & Grains were competitors although it was friendly competition. Then came the 2007 merger,” he says.
“What Robert Kuok spent 25 years building in China, since he went in before the country opened up, also became Wilmar’s, giving it an entrenched position in the market,” says an analyst covering Wilmar.
To Khoon Hong’s credit, Wilmar itself had a sizeable business in China with 12 soyabean crushing facilities by 2006. Wilmar and its parent Wilmar Holdings Pte Ltd traded 6.6 million tonnes of soyabeans and soyabean meal in 2006.
According to information provided in the announcement to the Singapore Exchange on the merger, Wilmar Holdings was already the largest oilseed crusher and edible oil refiner in China. It was also a major player in retailing cooking oil and has manufacturing facilities in oleo-chemical, flour and rice milling and specialty fats.
The merger created an integrated group, from the processing of oilseeds to the merchandising of finished agricultural products in China, while its manufacturing facilities would cover a wide range of agricultural commodities.
Meanwhile, upstream, Wilmar’s oil palm plantation landbank doubled to more than 500,000ha.
The trading of palm oil, oilseeds and grains is Wilmar’s biggest earnings contributor, making up 68% of its profit before tax in 2008 compared with 56.6% the previous year. Its plantations business contributed 17.9% while consumer products made up 4.2%.
Strong market intelligence
Wilmar is noted for its ability to ride the highs and lows in the commodity trade, given its integrated business model and global reach which provide it with significant market intelligence. Analysts say its dominant position in the midstream business allows it to better manage its commodity price risk and gain from crude palm oil (CPO) price movements. In 2008, Wilmar traded in 19.4 million tonnes of palm and lauric oils, capturing 44% of the global palm oil trade.
Its integrated business from source to finished product, capturing the entire value chain of the agricultural commodity processing business, allows the different segments to offset each other’s gains or losses.
“For plantations, if palm oil prices are down, it’s recovered by refining and manufacturing, unlike pure plantation businesses that are subject to volatility in CPO prices. It has always been the vision from the beginning, for the group to be totally integrated from A to Z,” says the source close to the company.
On Wilmar’s access to market intelligence, he says Khoon Hong is at the forefront in the edible oil trading business. It is believed that he still has a major say in the trading business.
“He is one of the main figures in the world of edible oil trade. Wilmar also has a very good marketing section,” he adds.
Indeed, Wilmar’s strong management team scores points with investors although some say it may be too dependent on Khoon Hong.
Wilmar’s strategic logistics is another advantage and cost saver as it strives to be the lowest cost producer. Its refinery is located at the port, for example, saving on transport. It also ships palm oil to China from Sandakan, a shorter shipping route than the one taken by Indonesian producers. Its venture into Uganda and West Africa will allow it to serve the Russian and Eastern European markets.
Besides China, India is another area of focus where “Fortune”, a cooking oil brand jointly owned by Wilmar, is the market leader. Per capita edible oil consumption in India is only 13kg, even lower than China’s 22kg.
The group has obviously set its eyes on developing markets such as Russia and the African continent, given the recent ventures into these regions. In 2007, a joint venture was formed with Olam International Ltd and SIFCA Group to develop “a regional leadership position in palm oil, natural rubber, sugar and potentially other agricultural crops in Africa”, according to its website.
SIFCA is one of Africa’s largest agro-industrial groups involved in palm oil, cotton seed oil, rubber and sugar in the continent.
It also formed a joint venture with Nizhny Novgorod Fats & Oils Group and Delta Exports Pte Ltd to spearhead expansion into Russia and the Commonwealth of Independent States comprising former Soviet Union republics.
With its latest investment — Three-A Resources Bhd — listed on Bursa, it is believed Wilmar is venturing further downstream. The company announced to the Singapore Exchange that it will enable Three-A and Wilmar to “collectively venture into any future overseas investments to explore the setting up of plants in China”.
The eventual listing of Wilmar China on the Hong Kong Stock Exchange will bring the group closer to its biggest market, a move that will earn it some brownie points from the Chinese authorities. However, going forward, there are concerns that the government may rein in foreign-owned food companies by imposing guidelines in the soyabean crushing industry, by limiting the total crushing capacity of any one player, for example, as food is a major security issue.
Nevertheless, Wilmar’s solid position in the Chinese market and the growing affluence of the population are mitigating factors.
This article appeared in The Edge Malaysia, Issue 776, Oct 12-18, 2009.