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Nippon Paint, a company deeply affected by China’s faltering real estate market, believes it can still make “big money” by rapidly expanding market share even if Chinese developers default.
Yuichiro Wakazuki, co-president of Nippon Paint, said he remains “cautiously optimistic” about China despite investor concerns about the impact of an economic slowdown on the Japanese group. The group derives 35% of its revenue from the world’s second largest economy.
By selling low-priced paint to the growing DIY market and focusing on home improvements, Wakatsuki hopes to quickly expand the company’s market share in China.
“You have to be very agile, you have to adapt to the market, you have to know what’s going on. You have to know what our competitors are trying to attack,” he said.
Wakatsuki aims to expand each business line’s market share from 8% to 24% to 40% “relatively quickly.” He added that there was potential for growth through acquisitions: “If there was an opportunity to acquire a company, I would acquire China.”
In 2020, Nippon Paint agreed to a $12 billion deal with its largest shareholder Wuthelam Group, a private company founded by Singapore’s richest billionaire Wu Zhengliang, to merge Asia’s two largest paints and coatings groups. The group’s current market capitalization exceeds 2.7 trillion yen ($18 billion).
As Chinese property developers began to fold two years ago, Nippon Paint began shifting its business model away from large projects to writing down its exposure to developers and requiring cash on delivery rather than extending credit. Developer Country Garden, one of its largest clients, has been scrambling in recent weeks to avoid defaulting on dollar bond payments.
The company’s stock price has risen 10% so far this year. But analysts at Mizuho said it would take more certainty about China’s stimulus plan before they would recommend buying the stock again, downgrading it to neutral in a recent note to clients partly due to concerns about China.
Nomura analyst Shigeki Okazaki believes a re-evaluation of the stock hinges on whether the company can improve margins and market share in China, or if the “growth potential in markets outside China” picks up again pick up.
In its 2020 deal with Wuthelam, Nippon Paint acquired a series of joint ventures it had established in Asia over the years. Wakatsuki, former chief financial officer of Nippon Paint and head of mergers and acquisitions at Japan Merrill Lynch, will take over the company’s top leadership in 2021. He shares power with Wee Siew Kim, who runs Nipsea, one of the paint businesses being bought back as part of the deal.
Nippon Paint has also bought back its India operations from Wuthelam, where it launched a promotional campaign targeting the southern states of Tamil Nadu and Karnataka. Nippon Paint plans to further expand into India.
“We believe Nippon Paint needs to develop regions outside China to increase its share of the commodity coatings market in the medium to long term. Whether it is Indonesia, India or Oceania, I don’t know,” said Mizuho analyst Atsushi Yoshida.
Wakazui said the move into India “is not about diversification away from China.” Analysts at Nomura Securities pointed out that the Indian business only accounts for 1% of the company’s earnings before interest, taxes, depreciation, and amortization.
