China & Hong Kong Mergermarket trend report Q1 2017

China & Hong Kong regional activities had a slow start into 2017, following historical highs in the past two years in terms of both M&A deal value and volume.There were only US$ 70.2bn announced deals across 341 deals in the first three months, though still higher than any other Q1 between 2001 and 2015 on Mergermarket record.

The region recorded US$ 67bn domestic M&A deal value (including intra- regional activities between China and Hong Kong), a drop of 18.5% from US$ 82.2bn during Q1 2016. This was also the lowest quarter since Q1 2014, when US$ 54.8bn worth of transactions happened across 262 deals.

Inbound interest slowed down to the lowest quarter in over a decade by number of deals, with only 23 announced deals totaling US$ 3.2bn. This was the worst performing quarter since Q1 2004, when only 18 deals totaling US$ 2.2bn was recorded. Despite China's open policy for foreign investment, capital outflow control imposed by Chinese regulators has also affected overseas investors' appetite, especially when returning profits from China to overseas shareholders becomes a concern.

The decrease either by deal value or by deal count has been seen in almost all seventeen sectors covered by Mergermarket, with the exception of only three, amidst investors' concerns over a weakening economy and tightening capital outflow control.

Despite all sluggish views of China's economy, Industrials & Chemicals (I&C) is still backed by the State Council's “Made in China 2025” plan that encourages domestic companies to move up the value chain. I&C regained the top position as the most active sector, accounting for 23.7% of total M&A deal value in China and Hong Kong. With US$ 16.7bn and 89 deals, the sector saw a mild flattening of 0.8% by value and nine less deals compared to the same period last year (US$ 16.5bn, 98 deals). With the support from government to upgrade business from low end manufacturing to high end manufacturing, the sector could provide a backbone to drive the region's M&A growth.

Technology, once the top sector in the past two years, slumped 42.1% by value to only US$ 11.2bn across 52 deals. The sector took a 15.9% share by value in China and Hong Kong targeted M&A deals. Koubei's US$ 1.1bn funding round led by US-based investor Silverlake was the only Technology deal in the top ten deals in this quarter with a humble ranking of 9th.

Real Estate, Leisure and Agriculture are the only three sectors in China and Hong Kong M&A activities seeing both uptick in deal value and volume comparing with the same period last year, each recording US$ 10bn, US$ 4.4bn and US$ 311m respectively. Real Estate's 14.3% share by value is largely backed by the top deal in the region - Shenzhen Metro's US$ 5.4bn investment for 15.3% stake in Vanke. Even with the support of largest deal of the quarter, the sector's deal value only retained 6.3% increase from Q1 2016 (US$ 9.4bn).

Outbound M&A from China and Hong Kong in Q1 2017 cooled down following a restraining policy for capital outflow since second half of 2016. Largely due to a change of environment of China's outbound M&A, total value was cut down by more than two-thirds to only US$ 25.5bn from Q1 2016's US$ 84.2bn, which includes ChemChina‘s US$ 45.9bn bid for Syngenta - the largest China outbound deal on Mergermarket record (since 2001). For more information about outbound analysis, please turn to Page 3.

Private Equity activities hit off to a sluggish start after consecutive increases in the last five years. Buyout activities amounted to US$ 9bn while exits totaled US$ 3.7bn. The number of buyouts deals almost halved to 21 and the total deal value was down by 33.2% compared to Q1 2016. Exit activities hit a wall and recorded only ten deals in the first three months, down by 16 deals and 35.6% in deal value year-on-year.

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