MULTINATIONALS: New China Board Should Welcome Yum, Uber

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Bottom line: China should expand its plans for a new enterprise board in Shanghai to include a place for the Chinese units of big multinationals like Yum and Uber, allowing domestic investors to buy into these big foreign names.

Calls grow for KFC parent to spin off China unit

Global fast food giant Yum Brands (NYSE: YUM) became the latest major multinational to contemplate a spin-off for its China business last week, following in the tracks of Uber and IMAX (NYSE: IMAX), two leaders in their respective areas of hired car services and big-screen theater technology. The trend acknowledges that China will soon become the world’s largest consumer market, and its unique qualities and complexities often justify creation of separate companies for these big global names to effectively develop the market.

China should seize on this trend and modify its current plans for a new Nasdaq-style enterprise board based in Shanghai to also include a place for these larger, newly created companies with foreign roots. Reports earlier this year indicated the regulator was aiming to roll out the new strategic industries board as soon as next year, though its plans could be delayed due to the recent turmoil on China’s stock markets.
With the markets showing recent signs of stabilizing, the regulator should quickly revive its plans for the new board, which could boost investor sentiment by hosting such premier private names as Baidu’s (Nasdaq: BIDU) iQiyi online video unit and Alipay parent Ant Financial. But the regulator should also strongly consider expanding the plans to include larger, foreign-connected companies like the Uber and Yum China units, giving Chinese investors a chance to buy into these premier global names as well.

At the end of the day, the 6-year-old Nasdaq-style ChiNext board in Shenzhen is already doing a good job of fostering smaller, start-up companies from strategic industries, and there’s no need to duplicate the model in Shanghai. Instead, the regulator should try to position the new Shanghai board as a place for a wider range of mid-cap private firms that are more mature but still have strong growth potential.

Some multinationals have discussed spinning off their Chinese units into separate companies for a while, but IMAX became one of the first to do so with the separation of its China business from the Canadian parent. IMAX was originally planning a domestic IPO for its newly created IMAX China (HKEx: 1970) unit, but later selected Hong Kong due to long waiting lines and a system that favors state-run firms in Shanghai and Shenzhen.

It finally made its debut last week and saw its shares jump 18 percent in their first 2 trading days, testifying to its strong growth potential in China’s booming theater market. (previous post) The path set down by IMAX was followed this year by Uber, which announced China would become its first global market to be run as a separate company, again testifying to the country’s huge potential and also its complex nature.

Calls Mount for Yum China Spin-Off

Now calls are mounting for Yum, China’s largest fast-food restaurant operator, to engineer a similar spin-off for its Chinese operations that account for more than half of the company’s revenue and profits. (English article) Yum shares sank nearly 20 percent last week, after it reported disappointing quarterly results and shocked investors by cutting its forecasts due to weakness in China.

That result turned up the pressure on Yum to spin off its China unit as a separately run business, which would include a sizable stable of nearly 7,000 stores. Proponents of such spin-offs say they give the separate China companies the flexibility they need to move aggressively to tap new opportunities and react quickly when scandals and other problems occur.

Talk was widespread 5 years ago that many big global names like General Motors (NYSE: GM), Coca Cola (NYSE: KO) and HSBC (HKEx: 8; LSE: HSBA) might consider spinning off their China operations into separate companies for listings on an international board that was being planned in Shanghai. But that plan was later abandoned as the regulator focused on stock market reform and promotion of the recently launched ChiNext board in Shenzhen.

More recently the regulator has been planning a new emerging industries board for Shanghai, which would compete with the ChiNext and is reportedly courting iQiyi and Ant Financial as some of its inaugural candidates. (previous post) That plan is likely to be delayed at least temporarily due to recent volatility in China’s stock markets, but should be quickly revived now that conditions appear to be stabilizing.

As part of that revival, the plan should be expanded to include a place for mid-cap companies like Yum and Uber China, which could have market capitalizations of as much as $15 billion based on current valuations. Such a move would create a unique market for strong growth but more mature mid-cap private companies in Shanghai, providing local investors with a new alternative to the high-growth but more volatile private small-cap firms now available on the ChiNext.

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