Industrials & Chemicals sector Comment – October 2015

Dato

China’s Chemicals M&A environment is growing increasingly active as target companies emerge in greater numbers and deal valuations rise. While such positive trends will draw into the future, numerous challenges remain that must be carefully managed.

China is consolidating its position as the largest global chemicals market, with industry output at RMB 13 trillion in 2014 and a 30% share of the global chemicals sector.

The long-term prospects will actually further strengthen China’s chemicals sector, not only through further expansion of scale and demand trade-ups, but also through the consolidation of chemicals players. We have observed a rise in the importance of in organic growth in this sector as well. Deal activity volume and size has picked up since 2011. China’s chemicals sector deals (domestic, inbound and outbound) are taking an increased weighting in the global deal landscape – roughly 10% to 20% during the past four years.

Going forward, we anticipate that M&A activities will remain at high levels across China’s chemicals sector for the next 2-3 years, due to a number of motivating factors.

The leadership of Chinese privately-owned chemical companies are quickly reaching retirement age, but issues over succession loom large. For many potential second-generation owners, the chemicals industry does not provide the appeal necessary to keep them on board. The issue of succession will inevitably motivate more privately-owned chemical company owners to look for alternative exit options.

Exits via trade sale have become increasingly attractive alternatives to IPOs, due to the unpredictability of the IPO process.

In respect to inbound acquisitions, Chinese companies are improving their compliance standards and thereby increasing their eligibility as acquisition targets for Western multi-national groups.

While overall M&A momentum will remain at high levels across the chemical industry in China, drivers behind commodity and specialty chemicals are diverging.

As a result of newly-added capacity and lagging demand, overcapacity in certain commodities sectors has become a serious issue.

Chinese speciality chemicals companies have pushed hard to catch up over the past decade, and their pace tends to be faster than what their Western peers often anticipate. Indeed some forward-looking Chinese chemical companies are undertaking strategic shifts to more application sectors.

On the Chinese outbound side, M&A activity from China has accelerated in recent years and will continue at high levels for years to come. In a change from when Chinese companies were perceived to just be resource, the next few years will likely see more Chinese outbound deals driven by technology, market and management needs.

In summary, China’s chemicals industry has been very active in M&A over the past few years. The momentum is likely to continue in the short-to-medium term. While consolidation in commodity chemicals sectors may provide an opportunity for integrated manufacturing in China, some specialty chemicals are highly sought-after by both trade buyers and new entrants.

M&A in China’s chemicals sector has also faced quite a few unique challenges in addition to the common challenges of valuation gaps and lacking M&A awareness.

A structured M&A process, as opposed to an opportunistic one, is more likely to bring success in the future. Rigorous strategies and systematic deal sourcing will become necessary for bringing to light the invisible champions of China’s market. In short, those who take the ‘right’ strategy and are able to recognize opportunities early and execute deals efficiently will benefit most from the huge and dynamic Chinese chemicals industry.