Commentary

China state fund shouldn't bite into fried chicken, pizza

Beijing's sovereign wealth fund CIC is considering a joint buyout of US-listed Yum China, which operates KFC, Pizza Hut and Taco Bell outlets in China.
Beijing's sovereign wealth fund CIC is considering a joint buyout of US-listed Yum China, which operates KFC, Pizza Hut and Taco Bell outlets in China.PHOTO: REUTERS

HONG KONG • Beijing's sovereign wealth fund could do without the fried chicken.

China Investment Corporation (CIC) may join a bid to take private Yum China Holdings, the US$14 billion (S$19.3 billion) operator of KFC, Pizza Hut and Taco Bell outlets in China, Bloomberg has reported.

According to the report on Tuesday, CIC and DCP Capital, the investment firm run by former KKR & Co senior executives, are part of a consortium considering a buyout of New York-listed Yum China.

Reuters reported separately that Yum China is considering delisting in the United States and relisting in Hong Kong, according to a source with knowledge of the plan.

A takeout has merits, but is also a risky distraction for the US$940 billion giant. Its mission is to invest the country's vast foreign exchange holdings abroad - not to dabble in complicated buyouts at home.

CIC can be excused for some confusion over its strategy.

One part of its mandate is to diversify China's reserves, but it also has to run Central Huijin Investment, which holds the government's stakes in domestic banks and other financial institutions. Central Huijin is also part of a "national team" of local financial institutions that gets rallied to prop up mainland equity markets from time to time.

This mixed mandate may have contributed to less than stellar returns overall. CIC had a good year in 2017, showing the potential of overseas gains: Those investments produced a net annual return of 17.6 per cent. But the annualised return for the period going back to 2008 is a more modest 6 per cent.

As equity markets and currencies become more volatile this year, CIC has plenty to keep it busy, including rebalancing its portfolios.

Just over half of its equity investments are in the United States and 14 per cent are in emerging markets. It also has less liquid stakes in unlisted foreign technology companies like Airbnb and Singapore-based Grab.

Taking Yum China private and relisting it in Hong Kong might well produce a better valuation.

Despite its growth potential, the company trades at under nine times the next 12 months' forecast Ebitda - a measure of operating profit - modest compared with competitors like Starbucks and McDonalds, and its shares have performed poorly this year, falling 12 per cent.

But the private investors named by news reports as potential consortium members - Baring Private Equity, Hillhouse Capital and KKR - don't really need CIC's money to pull this off, nor does CIC have much to contribute when it comes to running fried chicken or pizza chains.

With global markets wobbling - and domestic stock indexes falling too - CIC should put down the chicken bucket and focus on the day job.

REUTERS

A version of this article appeared in the print edition of The Straits Times on August 16, 2018, with the headline 'China state fund shouldn't bite into fried chicken, pizza'. Print Edition | Subscribe