This article is from: New Fortune Magazine | Authors: Li Yongli, He Mingyu
Since the late 1980s, companies under the umbrella of Malaysia's richest man, Robert Kuok, have leveraged advantages in raw materials, capital, technology, and management to encircle China's edible oil market through a two-pronged strategy.
On one front, through Kerry Oils & Grains, they focused on the downstream refining and sales segments, cleverly partnering with state-owned grain enterprises like COFCO to establish南海油脂 (Nanhai Oil & Fats), creating a series of small-packaged edible oil brands such as "Arawana" (金龙鱼). To date, these brands collectively hold over 50% market share, leading a transformation in Chinese consumers' edible oil consumption structure and laying a solid market foundation for integrating midstream and upstream resources.
On the other front, through Wilmar Holdings, they formed a joint venture with U.S. ADM, one of the world's four major grain traders, to establish Yihai Group, focusing on the midstream crushing segment. Seizing the opportunity during the 2002-2003 soybean market crash that nearly wiped out Chinese soybean crushers, they swept up domestic small and medium-sized oil mills through aggressive acquisitions, quickly establishing Yihai Group's dominance in crushing. By 2006, Yihai held over 16% market share in soybean crushing, becoming China's largest grain and oil processing enterprise. Simultaneously, Wilmar Holdings leveraged its palm oil raw material advantages to take equity stakes in oil enterprises under the "COFCO system." Thus, the Kuok family achieved a near "monopoly" across the mid-to-lower reaches of China's edible oil industry chain.
The comprehensive layout in the mid-to-lower reaches generated enormous demand for the family's overseas palm oil raw material production. Given the ultra-high profit margins in upstream planting, the Kuok family reaped even greater returns by expanding palm oil plantations and processing. More importantly, by positioning in the Chinese market, the family integrated its advantages in oil crop cultivation in Malaysia, Indonesia, and elsewhere with China's vast market, achieving vertical integration of the industry chain.
After stealthily gaining a leading position in China's edible oil industry through this two-pronged approach, and facing challenges such as COFCO's strong rise and domestic Malaysian competition for the "world palm oil supremacy," Kuok initiated a series of capital operations to secure his leading position and leverage synergies. Through a series of acquisitions and integrations on the Singapore and Malaysian capital markets, he created Wilmar International as the platform for his grain and oil assets. Subsequently, through this platform, he acquired all grain and oil assets under the Kuok family, including Kerry Oils & Grains and Yihai Group, in a share swap worth S$6.6 billion, integrating the upstream and downstream layout into Wilmar International, unifying vertical integration and horizontal scale.
Synergies led to rapid performance improvements. Based on 2008 net profit, Wilmar International surpassed Bunge, the world's third-largest grain trader. Wilmar's market value surged to US$12.4 billion by end-2008, laying the foundation for future expansion financing. Moreover, in July 2009, Wilmar began planning to spin off its entire China business for a domestic listing, responding to Chinese policies and public opinion increasingly favoring domestic grain enterprises and seeking to "de-foreignize." Concurrently, Wilmar initiated large-scale布局 in China's rice market using the same downstream-to-upstream approach.
Robert Kuok, head of the Malaysian Kuok family business, is perhaps the most widely recognized Malaysian Chinese internationally, aside from political leaders. From sugar, hotels, property, shipping, insurance, to media, Kuok has created countless miracles. His exceptionally low-key style has added legendary color to his career (see sidebar 1). Since Forbes Asia began compiling Malaysia's 40 richest list in 2006, he has topped it every year. Despite the 2008 financial crisis, Kuok remained the richest in Malaysia in 2009 with a fortune of US$9 billion, only US$1 billion less than in 2008.
Since the 1970s, Kuok expanded his business empire to Hong Kong, establishing Kerry Holdings Limited in 1974. Since then, "Kerry" has become the hallmark of the Kuok family's extensive business in Hong Kong and mainland China. Kerry Oils & Grains (China) Co., Ltd. (referred to as Kerry Oils & Grains) is the professional investment company for the Kuok family's grain and oil group (KOG) in China.
In 1991, Kuok's nephew Kuok Khoon Hong, together with Indonesian palm oil king Martua Sitorus, U.S. ADM (one of the world's four major grain traders), and COFCO, co-founded Wilmar Holdings (Figure 1), becoming another grain and oil business platform under the Kuok family. In 2000, Wilmar Holdings and ADM jointly established Yihai Group (referred to as Yihai). It is through Kerry Oils & Grains, Wilmar Holdings, and Yihai that the Kuok family has executed its two-pronged encirclement of China's grain and oil market since the late 1980s.
Today, Kerry Oils & Grains, through more than ten brands including "Arawana," holds approximately 50% of China's edible oil market share. Its industry chain integration approach, based on control of the terminal market, is equally impressive.
Starting from Downstream: Building Kerry Oils & Grains
Dominance in the Small-Packaged Edible Oil Market
By pre-arranging equity structure and brand ownership, Kerry forced COFCO to "cut flesh" from Arawana after gaining a foothold in China. From cooperation to separation, COFCO effectively served as the "guide" for its future biggest competitor's entry into the Chinese market. After 20 years of meticulous cultivation, Kerry Oils & Grains now holds half of China's edible oil market.
Borrowing COFCO's Path to Enter China's Edible Oil Consumer Terminal Market
In the late 1980s, Kerry Group Ltd (referred to as Kerry) and COFCO's wholly-owned subsidiary, Top Glory Co., Ltd. (referred to as Top Glory), jointly established Nanhai Investment (Hong Kong) Company (referred to as Nanhai Investment) in Hong Kong, with Kerry holding 51% and Top Glory 49% (Top Glory later transferred this stake to COFCO's Hong Kong-listed platform, COFCO International (00506.HK)). This marked the official start of Kuok's foray into China's grain and oil market.
On February 24, 1990, Top Glory transferred its 80% equity and paid-up capital of HK$28 million in Nanhai Oil & Fats Industrial (Chiwan) Co., Ltd. (referred to as Nanhai Oil & Fats) to Yaohe Development Co., Ltd. (referred to as Yaohe), a subsidiary in which Nanhai Investment held 81.25%. Yaohe replaced Top Glory as the major shareholder of Nanhai Oil & Fats, with COFCO holding the remaining 18.75% of Yaohe. It is clear that although the "COFCO system" held more actual equity, because Kerry held a 51% majority in Nanhai Investment, the controlling company of Yaohe, the actual control of Nanhai Oil & Fats was in Kerry's hands (Figure 2).
This seemingly insignificant equity arrangement became a key element for Kerry to maintain the upper hand in its cooperation with COFCO.
On January 8, 1990, Nanhai Oil & Fats officially opened, initially as a refinery in Shenzhen Shekou Free Trade Zone, mainly refining imported crude soybean oil. However, the emergence of the "Arawana" brand fundamentally changed this situation. In 1991, Nanhai Oil & Fats launched small-packaged edible oil under the "Arawana" brand, using the "welfare oil method" to open market gaps and rapidly expand.
According to statistics from the China Commercial Information Center for major retail stores in March 2002, "Arawana" held a market share of 28.67%, firmly ranking first in small-packaged edible oil, making Nanhai Oil & Fats a pioneer and leading enterprise in China's oil trade industry.
Due to Kerry's careful design of the equity structure and the arrangement of the "Arawana" trademark ownership, COFCO was at a disadvantage in the cooperation: COFCO indirectly held approximately 47% of the joint venture, making it the de facto largest shareholder, but without control. More importantly, the "Arawana" trademark was not owned by Nanhai Oil & Fats but was placed under the Singapore-based Kuok Group. Clearly, if Kerry built a new plant and used the "Arawana" brand to produce and sell the same products, COFCO would not benefit. This game pattern made it difficult for COFCO to share in the rapid growth of "Arawana," planting seeds for the eventual breakdown of cooperation.
In fact, the "different dreams in the same bed" became apparent shortly after cooperation began. After Nanhai Oil & Fats, Kerry made nine additional investments, expanding from one refining and canning base to eight, located in Shenzhen, Qingdao, Xi'an, Chengdu, Xiamen, Shanghai, Guangxi Fangchenggang, and Liaoning Yingkou Port. However, apart from Shenzhen Nanhai Oil & Fats, Kerry did not continue cooperating with COFCO. COFCO also began creating its own brands from 1992. In 1995, COFCO officially launched the "Fortune" (福临门) brand to develop the small-packaged edible oil market, and in early 2001, it injected the "Fortune" business into its Hong Kong-listed subsidiary COFCO International, hoping to increase investment in "Fortune" through the Hong Kong capital market.
On November 30, 2001, COFCO International formally signed a share sale agreement with Singapore-based Queensman for Nanhai Oil & Fats, citing "the sale of Nanhai Company allows the Group to concentrate resources on developing the 'Fortune' brand. Since the Group's investment ratio in Nanhai Company does not allow the Group to fully control its management, the directors believe the Group should concentrate and strengthen resources to manage and develop its edible oil production and distribution business under the 'Fortune' brand, for which the Group has exclusive use rights."
From COFCO International's perspective, this cooperation was quite unsuccessful. The announcement showed that COFCO International transferred 49% of Nanhai Investment for RMB 380 million, recording an investment loss of HK$5 million. At that time, Nanhai Investment had entered a profitable phase, with net profit attributable to shareholders after tax and minority interests of HK$44.609 million and HK$56.019 million in 1999 and 2000, respectively. More regrettably, COFCO effectively served as the "guide" for its future biggest competitor's entry into the Chinese market.
Subsequently, Kerry Oils & Grains gradually acquired the equity of Nanhai Oil & Fats held by Yaohe and other companies. By July 12, 2006, Nanhai Oil & Fats became a wholly-owned subsidiary of Kerry Oils & Grains.
Multi-Brand Strategy Shows Results, Market Share Reaches 40%
In addition to Arawana, Kerry Oils & Grains launched 16 brands in the Chinese market, with notable ones including Hu Jihua (胡姬花), Carp (鲤鱼), Yuanbao (元宝), Xiangmanyuan (香满园), Citibank (花旗), Handmark (手标), and Qiaochu (巧厨). This multi-brand strategy is rare among Chinese enterprises. According to Li Fuguan, then general manager of Nanhai Oil & Fats, rather than waiting for competitors to fight for market share, it's better to set up competitors yourself, positioning different brands at different levels, from high to low, across different product categories to curb competitor development. Public data shows that on December 12, 2003, Kerry Oils & Grains' small-packaged oil sales exceeded one million tons.
Kerry's multi-brand strategy proved effective. According to CTR Market Research's "2008 Edible Oil Brand Market Share Survey," Arawana had the highest market share in 2008, with actual and weighted shares of 30.83% and 29.98%, respectively. Hu Jihua ranked after Fortune and Luhua, with actual and weighted shares of 4.84% and 4.64%. Adding other listed brands like Xiangmanyuan, Yuanbao, and Carp, Kerry's brands collectively held 40% of China's small-packaged edible oil market.
More importantly, Kerry's small-packaged edible oil layout changed Chinese consumers' traditional preference for rapeseed oil, shifting to small-packaged oils primarily made from imported agricultural products like soybeans and palm oil. According to data from agricultural consultancy Orient Agribusiness, in the 2006-2007 season, soybean oil and palm oil ranked first and second in China's vegetable oil consumption, with shares of 37.3% and 21.4%, respectively (Figure 3).
This shift in China's edible oil consumption structure provided a solid foundation for the Kuok Group to integrate the midstream and upstream of the industry chain. According to the Chinese Cereals and Oils Association, 80% of soybean oil production raw materials currently rely on imported soybeans, while palm oil is entirely imported from Malaysia and Indonesia. As a major grain trader with deep roots in Malaysia, controlling the terminal market in China laid a brilliant foundation for integrating Malaysian plantations.
Alliance with ADM for Midstream: Yihai Becomes China's Largest Grain and Oil Processor
In the midstream, the Kuok Group used Yihai, directly controlled by Wilmar Holdings, as a platform. Seizing the "soybean crisis," it acquired oil mills at low prices, capturing about 20% of China's soybean processing market, and complemented Kerry Oils & Grains to comprehensively cover China's grain and oil market.
Large-Scale Acquisitions During China's "Soybean Crisis"
When Wilmar Holdings was first established, it primarily engaged in palm oil trading. Subsequently, through a series of acquisitions and new constructions in Indonesia, Malaysia, China, and elsewhere, it expanded into palm oil planting, production, trading, and logistics, serving as the Kuok family's grain and oil asset business platform. Leveraging advantages in scale, growth potential, geography, and low entry barriers, Wilmar Holdings focused its palm oil business expansion on China and India. Its layout in China relied mainly on Yihai, a joint venture with ADM, with business focus on soybean crushing and soybean meal in the midstream.
The 2003-2004 "soybean crisis" provided an unprecedented opportunity for Yihai's expansion in China. According to China Oils and Fats Network, before 2000, domestic enterprises dominated China's soybean crushing. Even by 2003, foreign-funded soybean crushing output accounted for only 18% of national production. However, in 2004, the Chicago Board of Trade (CBOT) soybean futures prices, the benchmark for international soybean trade, fluctuated violently, causing many Chinese soybean processors to purchase at high prices. Subsequently, soybean prices plummeted, leading to losses of RMB 500-600 per ton of soybean oil produced. Data shows that 70% of domestic crushing enterprises halted production, and many went bankrupt, causing China's "soybean crisis" (see sidebar 2).
Seizing this opportunity, the world's four major grain traders entered China in force (see sidebar 3), capturing market share through low-cost mergers and restructuring. Public data shows that among China's current 97 large soybean processing enterprises, 64 have foreign backgrounds, with actual processing capacity exceeding 50 million tons, accounting for 85% of domestic total; the share of domestic soybean oil processing enterprises in national soybean crushing volume rapidly declined, while foreign enterprises' market share quickly rose from 9% to 48%. Yihai is a typical example of rapid foreign expansion during this period.
Public information shows that from 2003 to 2005, within just two to three years, Yihai acquired no fewer than ten medium-sized oil mills in China, establishing grain and oil production bases in second- and third-tier cities such as Yantai, Qinhuangdao, Zhoukou, Lianyungang, Fuzhou, Wuhan, Quanzhou, and Changji. In the listing announcement of Wilmar International in 2006, there was a description: "Although Yihai entered the Chinese market relatively late, its development and layout were very fast. Starting from 2002, Yihai rapidly expanded through new construction, acquisition of old state-owned enterprises, and equipment renovation within two to three years. It established over 10 production plants and 20 sales companies in places like Fangchenggang and Lianyungang. At the time of merger (referring to June 2007), total investment was nearly US$500 million, with processing capacity of over 7.5 million tons of soybeans, peanuts, cottonseed, and rapeseed, producing over 2 million tons of various soybean oils, over 160,000 tons of peanut oil, over 200,000 tons of rapeseed oil, and over 600,000 tons of palm oil annually. Well-known edible oil brands in which it holds controlling or minority stakes include 'Koufu', 'Luhua', 'Fengyuan', and 'Sihai'." Data shows that by 2006, Yihai's daily soybean processing capacity reached 35,000 tons, accounting for over 16% of domestic market share, making it the leading enterprise in this field in China.
China business became Wilmar Holdings' main business. From the first quarter of 2005 palm oil sales revenue sources, we can see that its sales revenue in China accounted for nearly half of its total revenue (Figure 4).
Yihai and Kerry Complement Each Other, Kuok Family Covers China's Grain and Oil Market Comprehensively
Although Yihai and Kerry Oils & Grains are both grain and oil enterprises, they have little direct competition in business expansion in mainland China and are highly complementary. In product positioning, Yihai focuses on low-end products like the Koufu brand and OEM for large retailers like Carrefour, mainly using price strategies to capture the low-end small-packaged oil market. Kerry Oils & Grains uses Arawana to lead the mid-to-high-end product line, with Carp and some regional brands capturing the low-end market, while Hu Jihua holds the high-end market in some regions with peanut oil. This demonstrates an organic combination of high-end and low-end positioning. In terms of geographic layout of production bases, Yihai's 11 bases are in second- and third-tier cities like Wuhu (Anhui), Zhoukou (Henan), Qinhuangdao (Hebei), and Guanghan (Sichuan), while Kerry's eight major bases are mainly in first- and second-tier cities with convenient shipping and high consumption levels, such as Tianjin, Shanghai, and Shenzhen. They cross-cover different markets. In the industry chain, Yihai focuses on the midstream, while Kerry focuses on the downstream.
Through Yihai and Kerry Oils & Grains, the Kuok family has formed a comprehensive layout in China's grain and oil market, covering high-, mid-, and low-end products and first-, second-, and third-tier cities.
Planning Upstream for Higher Profits
The dual layout in downstream and midstream strongly drove the Kuok family's upstream expansion. As early as end-2005, its subsidiary PPB Oil Palms owned approximately 363,200 hectares of oil palm plantations in Malaysia and Indonesia, nearly tripling from 2002, and held about 70% of China's palm oil market. Additionally, leveraging upstream advantages, Kuok was able to take stakes in oil enterprises under the "COFCO system," maximizing sharing in the growth of China's edible oil industry. More notably, through this cross-border upstream-downstream layout, Kuok could effectively utilize different countries' tax laws for tax avoidance, making its overseas plantation enterprises' profit margins as high as approximately 24%, far higher than the 1.5-4% in China's terminal market.
Mid- and Downstream Layout Drives Upstream Expansion
The comprehensive layout of Yihai and Kerry Oils & Grains in the mid- and downstream rapidly increased demand for upstream raw materials. Therefore, while positioning in China's grain and oil market, the Kuok family accelerated the development of palm oil planting and production at the front end of the industry chain.
In the year Wilmar Holdings was established, it acquired 7,100 mu of land in Indonesia to establish oil palm plantations. In 2006, Wilmar Holdings' subsidiary Wilmar International, together with ADM, spent US$5.8 million to acquire five Indonesian plantation companies, increasing its plantation land reserves by 85,000 hectares. Through a series of subsequent acquisitions, Wilmar Holdings' plantation area rapidly increased. By end-2008, Wilmar Holdings had increased oil palm planting area to 223,300 hectares, with 160,800 hectares in Indonesia and 62,500 hectares in Malaysia (Table 1). Additionally, through the Plasma scheme, it managed 33,900 hectares in Indonesia.
As another upstream enterprise under the Kuok family, PPB Oil Palms is one of Malaysia's largest palm oil producers, with astonishing expansion speed. In 2002, PPB Oil Palms under PPB Group had oil palm planting areas of 77,000 and 25,700 hectares in Malaysia and Indonesia, respectively, totaling over 100,000 hectares. By end-2005, PPB Oil Palms owned approximately 363,200 hectares of land reserves, with about 80,000 hectares in Malaysia and 283,200 hectares in Indonesia, nearly tripling.
While increasing oil palm plantation area, the Kuok family also expanded palm oil production capacity. Since Wilmar Holdings established its first palm oil crushing plant in 1995, it continuously expanded in palm oil milling, crushing, and refining, rapidly increasing capacity. In 2006, Wilmar International acquired PGEO Group Sdn Bhd (referred to as PGEO), a subsidiary of PPB Group and a major Malaysian refiner and exporter of palm oil and palm kernel oil. The acquisition announcement showed that in 2006, 35% of the company's products were sold to China. Through a series of acquisitions and restructuring, by 2008, Wilmar International processed 1,505,200 metric tons of crude palm oil, up 26% year-on-year, and palm kernel processing reached 350,300 metric tons, up 25%. In 2007, Wilmar International's palm oil and lauric oil trade rose from 7.9 million tons in 2006 to 13.4 million tons, with palm oil sold to China exceeding 4 million tons in 2007. China Grain and Oil Information Center data shows that China's palm oil imports in 2007 did not exceed 6 million tons. Additionally, public industry data shows that Yihai Kerry holds approximately 70% of China's palm oil market (the Yihai Kerry acquisition process will be detailed later).
In other words, through its layout in the Chinese market, the Kuok family was able to combine its advantages in oil crop cultivation in Malaysia, Indonesia, and elsewhere with China's vast market, forming a complete value chain from upstream to downstream and achieving vertical integration of the industry chain.
Leveraging Raw Material Advantages to Take Stakes in "COFCO System" Oil Enterprises, Fully Sharing in China's Edible Oil Industry Growth
Since COFCO began creating its own brands in 1992, it has engaged in comprehensive cooperation with ADM and Wilmar Holdings. In 1992, the three jointly established Beihai Grain and Oil Industry Co., Ltd. in Tianjin. Over the next decade, Donghai Grain and Oil Industry Co., Ltd. in Zhangjiagang, Jiangsu; Huanghai Grain and Oil Industry Co., Ltd. in Shandong; Dongzhou Oil Industry Co., Ltd. in Zengcheng, Guangdong; and Dahai Grain and Oil Industry (Fangchenggang) Co., Ltd. were successively put into operation, mainly producing "Fortune" series edible oils and "Sihai" brand soybean meal. In November 2000, COFCO, ADM, and Wilmar Holdings jointly invested to establish Shanghai Fortune Food Co., Ltd., specifically responsible for the unified sales and promotion of Fortune brand small-packaged oil. The "Fortune" brand has been the second-largest brand in China's small-packaged edible oil market for ten consecutive years, second only to "Arawana."
In these joint ventures, COFCO clearly learned from its failure in cooperating with Kerry and firmly held controlling stakes, though Wilmar Holdings also held significant equity (Table 2). In COFCO's other two joint ventures, Laiyang Luhua and Shandong Luhua Nongxiang, COFCO held 24% equity, while Wilmar Holdings held 25% through Hong Kong Jiayin (Laiyang) Co., Ltd. The "Luhua" brand under these joint ventures is currently the leading brand in China's peanut oil sector.
COFCO chose ADM and Wilmar Holdings as partners largely due to their advantages in raw material supply. ADM is one of the world's largest soybean producers and traders. Wilmar Holdings, backed by palm oil production bases in Malaysia and Indonesia, largely controls palm oil planting, crushing, and sales, making it the world's major palm oil supplier. COFCO International stated in an announcement: "Our joint venture arrangements allow the Company to benefit from the joint venture partners' (ADM and Wilmar Holdings) extensive experience and good reputation in oilseed processing, raw material purchasing and supply strength, and advanced technology and management expertise, helping enhance the Company's competitive position in domestic and international markets." In other words, while Yihai and Kerry Oils & Grains were positioning in China's edible oil market, the Kuok family, through Wilmar Holdings' stakes in "COFCO system" oil enterprises, was able to maximize sharing in the growth of China's edible oil industry.
Vertical Integration of the Industry Chain Enables the Kuok Family to Reap Higher Profits from Upstream Raw Materials
The mid- and downstream layout created enormous demand for raw materials, allowing the Kuok family's overseas palm plantation and processing bases to share in higher profits by supplying raw materials. In 2002, PPB Oil Palms contributed 38.83% of profits to its controlling shareholder PPB Group, making it the primary profit source. This is also evident from Wilmar International's 2008 financial report after merging Kerry Oils & Grains and Yihai: In 2008, Wilmar's revenue and profit mainly came from palm oil and lauric oil refining and sales, plantation, and palm processing (Table 3), which together accounted for 65% and 54% of revenue and pre-tax profit, respectively. Consumer products, represented by small-packaged edible oil, accounted for only 16% and 4.2% of revenue and pre-tax profit. In terms of pre-tax profit margin, plantation and palm processing had a pre-tax profit margin as high as 24.74%, far higher than consumer products' 1.58%.
Challenges in Upstream and Downstream of the Industry Chain
It should be said that the Kuok family's strategic thinking in positioning in the Chinese market was very clear. Seizing every opportunity during the transition period of China's grain system, it captured a large share of the mid- and downstream markets. However, COFCO's market-oriented operations under Ning Gaoning's leadership and changes in Malaysia's plantation industry structure have had a non-negligible impact on its carefully built upstream-downstream integration model.
On March 17, 2006, the restructuring of COFCO's merger with Zhonggu Grain and Oil Group was officially approved by SASAC. As the two largest grain and oil enterprise groups among SASAC's 169 directly affiliated central enterprises, COFCO handled over 95% of China's grain import and export trade and was the main channel for national macro-control of grain import and export. Zhonggu Grain and Oil was one of China's largest state-owned grain and oil circulation enterprises, with five key operating regions in the Pearl River, Yangtze River, Yellow River basins, Northeast, Inner Mongolia, and Beijing-Tianjin-Tangshan area, and four operating systems: purchase and sales network, warehousing and transportation, grain and oil processing, and technology development, with a marketing network covering the whole country. It built four industry chains: grain, oil, feed, and technology engineering.
The significance of the merger is self-evident. Although COFCO handled over 95% of China's grain import and export trade, due to the old system of domestic grain internal and external trade, COFCO's integrated internal and external trade was difficult to achieve, lacking dedicated grain terminals and warehousing infrastructure domestically, leading to a severely lagging grain logistics system. Zhonggu, with its five key operating regions and four operating systems, complemented COFCO to a certain extent.
After the merger, COFCO had 15 wholly-owned, holding, and participating oilseed crushing and oil refining enterprises, with total assets of approximately RMB 70 billion and daily crushing capacity of over 30,000 tons of various oilseeds.
Under Ning Gaoning's leadership, COFCO accelerated its layout in the grain and oil industry chain with a "full value chain" strategic thinking, while intensifying capital operations. In addition to merging Zhonggu, it conducted a series of mergers and acquisitions of companies such as Xinjiang Tunhe, Shen Baoheng, China Resources Alcohol, and Fengyuan Biochemical through domestic and overseas capital markets. On October 9, 2006, COFCO's listed flagship COFCO International announced plans to spin off its grain and oil processing business for listing, creating a specialized capital platform for grain and oil processing: China Agri-Industries Holdings Limited (referred to as China Agri, 00606.HK).
On March 21, 2007, China Agri completed its spin-off listing on the Hong Kong Stock Exchange. The original COFCO International was renamed China Foods, focusing on food and beverage business. Some of COFCO's grain and oil businesses not previously listed were injected into China Agri through this restructuring, making China Agri the capital platform for COFCO's main grain and oil processing business.
The changes before and after the spin-off were significant. Before restructuring on October 8, 2006, COFCO International had a market value of HK$9.66 billion. After the spin-off, on the listing day, China Foods had a market value of HK$16.13 billion, and China Agri reached HK$19.85 billion. The enhanced financing capabilities of COFCO's two listed companies laid a solid foundation for future expansion.
In fact, from financial indicators, COFCO Group's business improved under Ning's era. By end-2006, COFCO Group's total assets reached RMB 106.71 billion, operating revenue RMB 79.49 billion, total profit RMB 3.7 billion, and taxes paid RMB 2.43 billion, up 78.6%, 78.3%, 134.2%, and 63.1% respectively compared to end-2004.
In addition to facing strong challenges from COFCO in the Chinese market, Wilmar International's palm oil supremacy in Southeast Asia also faced significant impact. On November 27, 2006, Malaysia's CIMB Investment Bank proposed merging the businesses of Sime Darby (SIME, 4197), Guthrie (GUTHRIE, 3131), and Golden Hope (GHOPE, 1953), all under state investment company PNB, integrating assets under Synergy Drive for RM31 billion. This merger would delist at least eight listed companies, unprecedented in Malaysia in terms of value and scale. The listed companies involved included, in addition to the above, Sime Engineering Services (SIMEENG, 2992), Sime United Properties (SIMEPTY, 1856), Guthrie Plantations (GROPEL, 2399), High and Low Lands (H&L, 2402), Mentakab (MTAKAB, 2518), and Negara Properties (NEGARA, 2437). Upon completion, Synergy Drive was expected to become the world's largest oil palm plantation group. The merger plan was widely favored by Malaysia's political and economic circles, who believed Synergy Drive could achieve cost efficiencies in procurement, operations, R&D, capital, and human resources.
Comprehensive Integration of Upstream, Midstream, and Downstream Through Capital Markets
Through the capital platform of Wilmar International, Kuok achieved the overall listing of his grain and oil assets, effectively integrating all links from raw material production, refining and processing, to terminal sales, bridging the gap between product manufacturing chain and commodity circulation chain, achieving vertical integration and facilitating synergies to reduce costs. More importantly, through these operations, ADM's direct equity in Yihai Group was converted into indirect holdings, diluting Yihai's foreign identity and helping reduce resistance to its further expansion in China.
Two months after COFCO International announced the spin-off of its grain and oil processing business, on December 14, 2006, Wilmar International (F34.SI), the Kuok family's grain and oil asset capital platform, announced a massive US$4.3 billion acquisition plan, beginning the comprehensive integration of the family's grain and oil assets. This came less than six months after Wilmar International's reverse merger listing through Ezyhealth Asia Pacific (see Kuok's Financial Tactics 1).
Second Acquisition: Comprehensive Integration of the Grain and Oil Industry Chain
Wilmar International announced on December 14, 2006, that the acquisition plan consisted of two parts: first, acquiring the palm plantations, edible oil, grains, and related businesses of the Kuok Group for approximately US$2.7 billion (referred to as "KG Acquisition," see "Kuok's Financial Tactics 2"); second, acquiring the edible oil, grains, and related businesses of parent company Wilmar Holdings, including shares held by ADM Asia Pacific Group, for approximately US$1.6 billion (referred to as "IPT Acquisition," see "Kuok's Financial Tactics 3").
Through these two acquisitions, Wilmar International achieved direct control of Kerry Oils & Grains' Chinese market business through KOG and realized the packaged listing of Yihai.
Large Acquisition Opens Up the Industry Chain While Achieving "De-Foreignization"
These two major acquisitions by Wilmar International were essentially the allocation and integration of grain and oil assets within the Kuok Group, with extraordinary significance.
First, through this acquisition, the new group would cover all links from raw material production, refining and processing, to terminal sales, with business running through the entire value chain, bridging the gap between product manufacturing and commodity circulation (Figure 5), achieving vertical integration and facilitating synergies to reduce costs.
Second, after the acquisition, Yihai and Kerry Oils & Grains, the Kuok Group's important platforms in China, effectively merged into a larger Yihai Kerry Group (referred to as Yihai Kerry). The newly formed Yihai Kerry had 12 soybean crushing plants, with daily crushing capacity of 34,000 tons and annual processing capacity of 10 million tons of soybeans, plus 8 peanut, cottonseed, and rapeseed crushing plants. Its daily oil refining capacity exceeded 13,000 tons, with annual refining capacity of over 4 million tons of various oils, making it the largest oil and oilseed enterprise group in the Chinese market. Since Kerry Oils & Grains held over 50% of the small-packaged edible oil market and Yihai had absolute dominance in soybean oil crushing, this merger was essentially a combination of the upstream and downstream of the value chain.
Third, in recent years, due to concerns about foreign monopoly in China's grain market, there have been constant doubts about the world's four major grain traders, including ADM. Through this acquisition, ADM's direct shareholding in Yihai Group was converted into indirect holdings, helping eliminate external doubts about Yihai's foreign identity. In fact, Yihai management emphasized Yihai's "overseas Chinese" identity on multiple occasions to distance itself from ADM. Yihai Kerry's CFO Lu Wenyu said in a media interview: "ADM only bought our shares listed in Singapore. Yihai Kerry's chairman Kuok Khoon Hong is also the nephew of patriotic overseas Chinese Robert Kuok. It's not like some rumors that Yihai Kerry is an ADM-controlled enterprise."
Synergies Evident After Acquisition
After the IPT and KG acquisitions, Wilmar International achieved vertical integration in the industrial value chain and rapid horizontal scale expansion. Post-acquisition, Wilmar not only significantly increased refining capacity but also doubled its land reserves for oil palm planting, from 210,000 hectares before acquisition to 573,400 hectares. Credit Suisse also noted in a research report that the merged Wilmar International could refine one-quarter of the world's palm oil. Clearly, large-scale production can generate economies of scale and reduce processing costs.
The comprehensive layout in the industrial value chain and the synergies from the merger drove Wilmar International's rapid development. Financial reports show that Wilmar International achieved net profit of US$195.1 million in Q3 2007, 5.4 times the US$36.3 million in Q3 2006 before the acquisition. Meanwhile, pre-tax profit contributions from various business segments began to balance (Figure 6), indicating that economies of scope from synergies enhanced the group's risk resistance.
Data shows that amid global financial market turmoil, Wilmar International's average return on assets in 2008 was 9.2%, up 3.2 percentage points from 2007, and average return on equity rose from 13.3% in 2007 to 17.5% (Figure 7). In Q1 2009, despite a 30.6% year-on-year decline in sales revenue, net profit still grew 10.8% year-on-year, further demonstrating the synergies from the merger.
Leveraging China Business, Wilmar International's Net Profit Surpasses Bunge
Wilmar International's 2008 financial report released on March 4, 2009, showed that as of December 31, 2008, the company's operating revenue reached US$29.145 billion, up 77% year-on-year; net profit reached US$1.531 billion, a surge of 164%.
Earlier, the world's three major grain traders ADM, Bunge, and Cargill had released their FY2008 reports: ADM revenue was US$69.816 billion (as of June 30, 2008), Bunge US$52.574 billion (as of December 31, 2008), and Cargill US$120.439 billion (as of May 31, 2008).
In terms of net profit, ADM, Bunge, Cargill, and Wilmar International were US$1.802 billion, US$1.064 billion, US$3.951 billion, and US$1.531 billion, respectively. Cargill ranked first in total profit, while Wilmar International surpassed Bunge and led with a 164% growth rate, showing strong development momentum.
From the revenue structure, Wilmar International's revenue for 2006-2008 was US$7.016 billion, US$16.4661 billion, and US$29.1 billion, respectively. Revenue from China reached US$4.177 billion, US$8.482 billion, and US$14.326 billion, accounting for 47%, 52%, and 49% of total revenue (Table 4). The China region held absolute weight in Wilmar's business composition (Figure 8), showing the significant impact of the Chinese market on Wilmar's high growth. Meanwhile, Wilmar's investment in China showed a linear upward trend, indicating its high optimism for the Chinese market (Figure 9).
The Mystery Behind the Spin-off Listing of China Business
On July 6, 2009, Wilmar International officially confirmed that it had appointed Goldman Sachs, Morgan Stanley, and BOC International Holdings to prepare for the IPO of its China business. Yihai Kerry's vice chairman Mu Yankui told the media that the listing location would be Hong Kong, and the timing should be "as soon as possible."
If Yihai Kerry needed financing, it could easily use Wilmar International as a capital platform. This seemingly unnecessary spin-off and secondary listing undoubtedly had other reasons. What considerations did Wilmar International's management have?
In fact, as foreign grain and oil enterprises like Wilmar International grew rapidly in China, domestic public opinion frequently expressed concerns about food security risks from their monopoly layout. The government also introduced a series of policies to encourage the development of domestic grain and oil enterprises. On September 3, 2008, the National Development and Reform Commission (NDRC) issued the "Guiding Opinions on Promoting the Healthy Development of the Soybean Processing Industry," which explicitly proposed supporting national soybean processing enterprises, guiding domestic processors to integrate resources through mergers and restructuring, and cultivating a batch of soybean oil processing enterprises (groups) with daily processing capacity above 2,000 tons, integrated production, processing, and sales, and strong competitiveness. It also restricted foreign investment, stating that foreign mergers and restructuring of domestic oil processing enterprises must strictly follow national foreign investment laws, regulations, and industrial policies.
In the NDRC's "Notice on Doing a Good Job in the 2009 Rapeseed Purchase Work," it was stipulated for the first time that enterprises could participate in price-support purchases. According to regulations, before the rapeseed market price recovers to above RMB 2.00 per jin, the central government would provide entrusted enterprises with a one-time fee subsidy of RMB 0.10 per jin, reducing costs by RMB 200 per ton for crushing enterprises. None of the more than 100 enterprises on the list were foreign-funded, and Yihai Kerry was naturally not included.
Clearly, if Yihai Kerry listed domestically, it would make the enterprise more "localized," beneficial for the stability of its China business and reducing potential policy resistance to further expansion. In fact, Yihai Kerry's spin-off listing was precisely in response to this external environment change. Mu Yankui admitted that the main purpose of Yihai Kerry's domestic listing was not financing, but that after listing, Yihai Kerry could naturally transform into a genuine domestic enterprise, shedding the "foreign" label and restrictions.
Kuok's Financial Tactics 1: Reverse Merger to Create a Capital Operation Platform for Grain and Oil Assets
Wilmar Holdings set favorable share consolidation and value protection clauses to retain original shareholders, not only diluting their equity in the new company but also keeping most shareholders within the new company, laying the groundwork for Wilmar International to maintain its listing status and later absolute control.
The Kuok family, borrowing COFCO's path, achieved dominance in China's small-packaged edible oil market. After the soybean crisis of 2002-2003, it took advantage of COFCO's hesitation to directly enter the Chinese market through low-cost acquisitions, controlling the midstream.
In October 2004, Ning Gaoning, known as "China's Morgan," parachuted into COFCO. At the end of the year, China National Native Produce and Animal By-Products Import and Export Corporation was incorporated into COFCO. In response to the new competitive landscape, the Kuok family began planning to connect its grain and oil assets with the capital market, creating a capital operation platform for grain and oil assets.
On December 23, 2005, Singapore-listed Ezyhealth announced a reverse merger plan by Wilmar Holdings. According to the plan, Ezyhealth would issue 21.5 billion new shares to Wilmar Holdings to purchase its palm oil business, completing asset injection, and Wilmar Holdings' palm oil business would achieve backdoor listing through this capital platform.
Wilmar Holdings injected a group of 52 companies related to palm oil business, covering planting, transportation, trading, and other related enterprises, which were large enterprises engaged in oil crop planting, palm oil refining, and crushing. As of end-2004, Wilmar Holdings' palm oil business had annual revenue of US$5 billion (S$8.35 billion), net profit after tax of US$60.4 million, and net tangible assets of US$21.89 million.
Analysis shows that Ezyhealth was an ideal backdoor listing target. First, its share capital was relatively small. As of December 23, 2005, Ezyhealth had total shares of 261.7 million, and since its listing in 2000, its stock price had performed poorly, hitting a low of S$0.025 on June 27, 2005. A small market value was conducive to reducing acquisition costs. Second, its unique shareholder structure: Ezyhealth's major shareholders were mostly chairmen, managing directors of several Singapore-listed companies, and the listed companies themselves. The Kuok family's extensive connections in Singapore helped reduce communication costs. Finally, the original president of Ezyhealth, Sim Kheng Choo, repurchased the company's existing business for S$5 million (net tangible assets of approximately S$7.4 million), making Ezyhealth a "shell," facilitating Wilmar Holdings' injection of core assets.
Wilmar Holdings' reverse merger plan was cleverly designed. According to the Singapore Exchange listing rules, to maintain its listing status, Ezyhealth must have no fewer than 1,000 shareholders holding its issued shares. To achieve this, Wilmar Holdings set favorable share consolidation and value protection clauses to retain original shareholders. According to the plan, before placing shares, Ezyhealth's original shareholders' shares were consolidated on a 10-for-1 basis, with the price at that time S$0.05 per share, becoming S$0.5 per share after consolidation. Meanwhile, to prevent original shareholders' shares from depreciating during placement after consolidation, Wilmar Holdings set a value protection clause: if the placement price was below S$0.55, original shareholders would receive cash compensation equal to the difference between the placement price and S$0.55, capped at S$0.20 per share. These measures not only diluted original shareholders' equity in the new company but also kept most shareholders within the new company, laying the groundwork for Wilmar Holdings' later absolute control.
After completing the injection of the palm oil business, Wilmar Holdings' shareholding in Ezyhealth reached 98.8%. According to Singapore Exchange regulations, to maintain Ezyhealth's listing status, the public must hold more than 12%. Therefore, Wilmar International publicly issued 300 million shares at S$0.8 per share, expanding total shares to 2.533 billion, with public shareholding exceeding 12%, while maintaining absolute control with 81.92% (Figure 1). Ezyhealth was renamed Wilmar International Limited.
Through the backdoor listing, the Kuok family not only created a capital operation platform for grain and oil assets—Wilmar International—laying the foundation for future operations, but also raised S$240 million from the capital market, providing funds for further expansion. On July 14, 2006, the reverse merger was officially completed. Based on the closing price of S$1.05 that day, Wilmar International's market value reached S$2.7 billion, 80 times the injected tangible assets of US$21.89 million (as of end-2004).
Kuok's Financial Tactics 2: Clever Design of KG Acquisition Plan, Kerry Oils & Grains Connects to Capital Market
Using share swaps to acquire listed company equity reduces Wilmar International's financial pressure while helping maintain its listing status. For special equity structures, targeted issuance and partial acquisition simplify procedures and reduce cash outflow pressure.
At end-2006, Wilmar International issued approximately 2.403 billion shares to acquire three companies under the Kuok Group (Figure 1)—PPB Oil Palms Berhad (referred to as PPB Oil Palms), Kuok Oils & Grains Pte Ltd (referred to as KOG), and PGEO Group Sdn Bhd (referred to as PGEO)—for approximately S$4.1 billion (calculated at the closing price of S$1.71 on December 13, 2006, approximately US$2.7 billion).
These three companies not only covered the Kuok Group's palm plantations, edible oil, grains, and related businesses but were also closely related to the Chinese market. Among them, KOG was the controlling shareholder of Kerry Oils & Grains, which had invested in over 20 enterprises in Shenzhen, Shanghai, Tianjin, and other places, forming a nationwide network. Kerry Oils & Grains' edible oil sales reached 1 million tons in 2003, with sales revenue of over RMB 13 billion. KOG's specialty oils production and sales covered 150 cities in China, with sales volume reaching 240,000 tons in 2005. Additionally, PPB Oil Palms was a Malaysian listed company mainly engaged in oil palm planting and crushing, while PGEO was a major Malaysian refiner and exporter of palm oil and palm kernel oil, with 35% of its products sold to China in 2006, as stated in the announcement.
As of December 13, 2006, PPB Oil Palms had total shares of 445 million and a market value of approximately RM4 billion. A cash acquisition would have increased Wilmar International's cash flow pressure. Therefore, Wilmar International acquired PPB Oil Palms at a ratio of 2.3 Wilmar shares for each PPB Oil Palms share. Based on the exchange ratio (Wilmar at S$1.71 per share, PPB Oil Palms at RM9.046 per share, with an exchange rate of S$1 to RM2.30), approximately 1.024 billion new shares were issued.
The capital market highly endorsed this share swap acquisition. On December 17, 2006, Wilmar International resumed trading and surged 20% to close at S$2.05, while PPB Oil Palms rose 17% to close at RM10.50. Since Wilmar's share price increase was higher than PPB Oil Palms', it actually increased the incentive for PPB Oil Palms shareholders to swap, improving the success rate of the acquisition.
Encouraging PPB Oil Palms public shareholders to swap was crucial for maintaining Wilmar International's listing status: after the swap, Malaysian public shareholding in Wilmar International was approximately 7.1%, plus 6.7% Singapore public shareholding, just exceeding the 12% threshold.
PGEO and KOG were companies within the Kuok Group, making transactions relatively simple. Wilmar International directly acquired them through share issuance. PGEO's equity was divided into two parts: PPB Oil Palms held 34.24%, and the remaining 65.76% was held by FFM Group, a subsidiary of PPB Group. Wilmar International issued 287 million new shares to acquire all shares held by FFM Group.
Given KOG's special equity structure, Wilmar International completed the acquisition in two parts. First, it acquired 72% held by Kuok (Singapore) Limited, Harpole Resources Limited, and Greenacres Limited (all members of the Kuok Group). Second, it acquired the remaining 28% held directly by FFM Group (17.1%) and through its wholly-owned subsidiary (10.9%).
For the first part, Wilmar International issued 786 million new shares, acquiring 72% of KOG for approximately S$1.3 billion. For the second part, it issued 306 million new shares to FFM Group and its subsidiaries, valued at S$522.6 million, to acquire the remaining 28%. Thus, Wilmar International acquired 100% of KOG.
In May 2007, Wilmar International completed the acquisition of PPB Oil Palms and PGEO, and on June 28, the acquisition of KOG was officially completed. After the acquisition, Wilmar International directly controlled Kerry Oils & Grains' Chinese market business through KOG.
Kuok's Financial Tactics 3: ADM Cooperation, IPT Acquisition Smoothly Proceeds, Yihai Group Packaged Listing
ADM's subsidiary integration simplified the acquisition process, and ADM's direct shareholding in Yihai Group was converted into indirect holdings, helping eliminate doubts about Yihai Group's foreign identity.
While acquiring the Kuok Group's KG assets, Wilmar International acquired the edible oil, grains, and related businesses of parent company Wilmar Holdings, including shares held by ADM and its subsidiaries (Figure 1), for US$1.6 billion (approximately S$2.5 billion, calculated at the closing price of S$1.71 per share on December 13, 2006). Specifically, Wilmar International issued 1.022 billion new shares to acquire the branches of controlling shareholder Wilmar Holdings for approximately S$1.7 billion, and issued 427 million new shares to acquire ADM's branches ADM (Asia Pacific), ADM (China), and Global Cocoa for approximately S$730.6 million. The IPT acquisition was directly related to China business, with 93% of assets and capacity coming from China. IPT's China business was conducted through Yihai Group.
To simplify the acquisition process, Wilmar Holdings established an SPV (Special Purpose Vehicle) to hold IPT assets. Wilmar International issued 1.022 billion new shares to Wilmar Holdings to acquire the SPV, which became a wholly-owned subsidiary of Wilmar International after the acquisition.
Logically, the biggest obstacle might have been Yihai Group's other foreign shareholder, U.S. ADM, as ADM was the largest external shareholder in this major Kuok Group acquisition. However, ADM not only did not become an obstacle but became a strong driving force, enabling Wilmar International to smoothly complete a series of equity adjustments.
After Wilmar International announced the acquisition on December 14, 2006, ADM's subsidiary Global Cocoa merged all shares of another subsidiary, ADM (China). Thus, Wilmar International's acquisition of Global Cocoa was equivalent to acquiring ADM (China), without needing a separate acquisition agreement with ADM (China). Ultimately, ADM converted its equity in IPT assets into 427 million new Wilmar International shares. On May 10, 2007, Wilmar International formally signed equity acquisition agreements with three ADM subsidiaries. On June 22, 2007, the IPT acquisition was approved by Wilmar International's shareholders' meeting, completing the acquisition of Wilmar Holdings' relevant assets.
After the KG and IPT acquisitions, Wilmar International's total shares expanded to 6.387 billion, with Wilmar Holdings holding 48.5% and the Kuok Group approximately 31%. ADM directly held 6.7% and indirectly held 19.6% (Figure 2).
Based on Wilmar International's share price of S$3.12 on June 18, 2007, when the major acquisition was fully completed, the company's market value reached US$13 billion, making Wilmar International the highest-valued agricultural listed company on the Singapore Exchange.
This article is reprinted from: Poker Investor
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