In the process, Li would aim that firepower against foreign rivals such as Mannings, controlled by Jardine Matheson Group's Dairy Farm International Holdings Ltd, Alliance Boots, 45% owned by Walgreen Co, the biggest US drugstore chain, and Vivo, part of China Resources Enterprise Ltd.
Billionaire Li's conglomerate Hutchison Whampoa Ltd last week scrapped the sale of ParknShop, its Hong Kong supermarket chain, and said it would carry out a strategic review of A.S. Watson Co Ltd, its retail arm, which includes ParknShop, the Watsons, Superdrug and Kruidvat personal care stores, Fortress electronic appliance outlets, and chains selling food and wine and luxury and cosmetic products.
That review may include an initial public offering of all or parts of the business, it said, without elaborating. .
Applying a 14 times multiple to last year's earnings before interest, tax, depreciation and amortisation (EBITDA) of US$1.64 billion (RM5.17 billion), an IPO could value A.S. Watson at about US$23 billion (RM72.48 billion), bankers and analysts estimate. If 25% of A.S. Watson is floated, a standard Hong Kong IPO percentage, the IPO could raise close to US$6 billion (RM18.9 billion).
Health, beauty and luxury retailing accounted for 82% of 2012 revenue at A.S. Watson, which has its roots in a small dispensary set up in 1828 to provide free medical services to the poor in the southern province of Guangdong.
"China's health and beauty retail industry is fragmented, and Watson has more room to grow," said John Chan, an analyst at Standard Chartered. "The biggest hurdle to growth would be finding the right store location."
A.S. Watson, which generated US$19.2 billion (RM60.5 billion) in revenue last year from some 11,000 outlets worldwide, is the market leader in personal care in China, a fragmented landscape of mainly small mom-and-pop stores where the top 10 firms control less than 5%. A.S. Watson leads with just a 1.6% share of the market that was last year worth US$134 billion (RM422.3 billion).
"China has been A.S. Watson's growth engine, and given the huge growth opportunity and attractive returns, we would expect part of any IPO proceeds to support the expansion of the Watsons franchise there," said Chan.
Since 2008, it has tripled its China store count to 1,438, adding more than a store a day on average last year. Its China operating profit has grown four-fold to more than HK$3 billion (RM 1.22 billion) in that period. The business has a near-20% operating margin.
By comparison, Mannings has said it plans to grow its network of stores across China, which stood at 187 last year, while Alliance Boots has struck two deals to expand in China, with one of its partners owning 500 retail stores. State-backed China Resources owns 165 health and beauty Vivo stores in China.
Li, dubbed "Superman" in Hong Kong's business centre because of his financial record, (he built a sprawling ports-to-telecoms empire from a plastic flower business in the 1960s), is targeting fast growing lower-tier cities for his expansion plans across China, said people familiar with the matter.
China accounts for 24% of A.S. Watson's operating profit, but only 13% of its retail store count; two thirds of the group's stores are in Europe. Its China health and beauty retailing business recorded 17% revenue growth in 2012, the fastest among the group's geographies.
Western Europe's health and beauty retail market shrank 8% last year and is forecast to grow just 4% by 2015, to around US$306 billion (RM964.3 billion), Euromonitor forecasts.
"Growing organically in China makes a lot of sense given the returns," said CLSA analyst Jonathan Galligan. "They could also build more scale in Southeast Asia and you could see them making acquisitions in retail space in Europe, something they haven't done in size since 2006."
The A.S. Watson review is the latest move by Li, ranked by Forbes as the eighth richest person in the world, with a near US$31 billion (RM97.7 billion) fortune, that some commentators have suggested shows he is cutting his exposure to Hong Kong and freeing up cash to invest elsewhere. Last month, Li announced plans to list his Hong Kong power assets in a deal that could raise about US$5 billion (RM15.76 billion). - Reuters, October 23, 2013.