Nippon Paint, a company with significant exposure to China’s struggling property market, is confident it can remain profitable despite the challenges. Co-president Yuichiro Wakatsuki expresses cautious optimism about China’s market dynamics, even as concerns about the property market persist. Nippon Paint derives 35% of its revenues from China.
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Wakatsuki’s strategy involves targeting the growing DIY market and home renovations by selling lower-value paints. He aims to rapidly expand the company’s market share in China, with a goal to increase market share across various business lines from 8-24% to 40%.
Wakatsuki also sees potential for growth through acquisitions, expressing a willingness to buy companies in China when opportunities arise. In 2020, Nippon Paint entered into a $12 billion deal with its largest shareholder, Wuthelam Group, combining two major paints and coatings groups in Asia.
As the Chinese property market faced difficulties two years ago, Nippon Paint adapted its business model by moving away from large-scale projects, reducing exposure to developers, and insisting on cash-on-delivery terms instead of extending credit. One of its significant clients, Country Garden, has been struggling to avoid defaulting on dollar bond payments.
Nippon Paint’s share price has seen a 10% increase this year, but analysts at Mizuho remain cautious, waiting for more certainty regarding China’s stimulus plans before recommending the stock. Concerns about China prompted them to downgrade it to a neutral rating in a recent client note.
Analyst Shigeki Okazaki from Nomura believes the reassessment of the stock depends on Nippon Paint’s ability to boost margins and market share in China or the potential for growth in markets outside China.
In its 2020 deal with Wuthelam, Nippon Paint acquired several joint ventures in Asia that it had established over the years. Yuichiro Wakatsuki, the former CFO of Nippon Paint and head of mergers and acquisitions for Merrill Lynch in Japan, assumed leadership of the company in 2021. He shares power with Wee Siew Kim, who oversees Nipsea, one of the paint businesses included in the deal. Nippon Paint currently boasts a market capitalization of over ¥2.7tn ($18bn).
Nippon Paint has taken back control of its Indian operations from Wuthelam, where it previously launched a promotional campaign with a focus on the southern states of Tamil Nadu and Karnataka. The company has ambitious plans for further expansion in India.
According to Atsushi Yoshida, an analyst at Mizuho, Nippon Paint recognizes the need to develop markets beyond China to enhance its presence in the commodity paint sector in the medium to long term. He mentioned potential expansion in regions like Indonesia, India, or Oceania.
However, it’s important to note that this expansion into India is not driven by a desire to reduce dependence on the Chinese market, as clarified by Wakatsui. Nomura analysts also pointed out that the Indian businesses currently contribute only 1% to the company’s overall earnings before interest, tax, depreciation, and amortization (EBITDA).