Itochu, CP Group to invest $10 billion in China's Citic

Japanese trading house Itochu Corp and Thailand's Charoen Pokphand Group (CP) said on Tuesday that they plan to jointly invest $10 billion in Citic Ltd, part of China's oldest and biggest conglomerate.

Itochu and CP Group plan to take a joint stake of 20 percent in Citic Ltd, increasing their exposure to the world's second-biggest economy even as it slows from the blistering growth of the past decade.

The deal fits with Citic's mission to broaden its investor base into the private sector as part of Chinese President Xi Jinping's reforms to state-owned enterprises.

"Not only have we brought in private investors, but they are attractive global conglomerates who will extend our reach," Citic chairman Chang Zhenming said in a statement.

Citic Ltd completed a restructuring in August by injecting about $36 billion worth of assets into a Hong Kong-listed unit as part of this reform program.

Itochu's investment will be the biggest ever made by a Japanese company into China.

CP Group was the first multinational to invest in China's agri-business industry in 1979, helping it modernize the country's farm sector. The conglomerate is controlled by one of Thailand's richest men, Dhanin Chearavanont, and its investments in China over the years have ranged from agriculture and retail to finance.

Bold bet

While deals between Chinese and Japanese companies have become more frequent in recent years, Thomson Reuters data show that most have been small. The 55 Japanese acquisitions in China last year were worth a total of around $772 million.

The investment is also the biggest ever by Itochu, which has been trying to expand its business interests beyond resources, an area where it spent heavily during the global commodities boom through the early 2010s.

Before the Citic Ltd deal, Itochu's biggest investment was a 156.9 billion yen purchase of two units of US vegetable and fruit producer Dole Foods in 2013.

"By the 2017 financial year, it's quite possible we'll have secured a position as Japan's top non-resource trading house and perhaps even have within our sights the top spot in the industry,"　Itochu President Masahiro Okafuji told a news conference.

The deal will take place in two stages, with Itochu and CP Group agreeing to buy nearly 2.5 billion shares in Citic Ltd for HK$34.4 billion in April this year, and a further 3.3 billion shares for HK$45.9 billion in October.

Some analysts said the investment, which will likely require borrowing from banks, appeared risky for Itochu considering its market capitalization was only slightly over 2 trillion yen.

"From a concentration risk perspective, it appears to be high risk," said Nomura Securities analyst Yasuhiro Narita.

"While Citic is a conglomerate, it deals with areas such as real estate and raw materials development which are facing deteriorating conditions, we need to note the possibility of future losses," he added.

Itochu's Okafuji, asked about such risks, said the investment was long-term but that it could eventually sell its stake for a profit if needed.