KPMG International's annual Global M&A Predictor forecasts a substantial increase in deal-making appetite in China for the coming year, due to resilience in the domestic stock markets, rising demand for energy and resources and further consolidation within the consumer and telecom sectors.
KPMG's Global M&A Predictor tracks 12 month forward Price to Earnings (PE) multiples and estimated net debt to earnings before interest, tax, depreciation and amortization (EBITDA) ratios to track and establish the potential direction of M&A activity.
On a Global basis, forward PE ratios are now seven percent higher (at 14.0x for 2010 versus 13.1x for 2009) while net debt to EBITDA ratios are expected to decline by 18% from 1.5x to 1.2x. For the ASPAC region (excluding Japan) forward PE ratios are at 35%.
In contrast Mainland China exhibits a much higher increase of PE ratios, at 36% from 10.6x to 14.4x. This is also significantly higher than 15% and 16% for Hong Kong and Taiwan respectively. Improving forward PE ratios indicate enhanced deal-making appetite while declining net debt to EBITDA ratios equate to improved deal-making capacity.
"China is playing catch up. As the world's second largest economy it currently accounts for less than 8% of global deals. In recent months we have therefore seen a surge in M&A activity with corporate-to-corporate leading the way, closely followed by private equity firms," says Paul Chau, Head of M&A Advisory at KPMG Corporate Finance Hong Kong and a partner in the China firm.
On the net debt to EBITDA ratios, China net debt to EBITDA ratio declines 18% from 1.1x to 0.9x compared with that of 16% for Hong Kong from 0.6x to 0.5x. Taiwan companies included in the KPMG's Global 1,000 Index still sits on net cash and hence the net debt to EBITDA ratio remains negative. AsPac (exc. Japan) meanwhile forecasts a decline of 20% from 1.5x to 1.2x.
Noting interesting trends across several sectors, Paul Chau says that a number of sub-sectors are still fragmented within consumer markets in Mainland China. They have also recently seen consolidation in the food and beverage sector due to intensifying competition and stricter regulations. Within the retail sector, KPMG also sees consolidation among the domestic players due to large overseas entrants in the market and the need therefore to be increasingly cost-competitive. He adds that the Chinese government has also recently announced plans to encourage industry consolidation and restructuring in a number of technology sub-sectors, with a view to creating home-grown industry leaders in this space.
"In addition, the re-opening of the IPO market in China, including the launch of the Growth Enterprise Market in Shenzhen, has created tremendous momentum in the IPO pipeline, with over 200 companies waiting to be listed in 2010. The availability of exits through IPOS is being reflected in the recent surge in PE deals. We therefore expect to see very strong deal closings in the first half of 2010," he notes.