Unilever (UL), the second largest consumer goods company in the world after Procter Gamble (PG), recently announced plans to build one of its largest production bases in China. Unilever already has sales in China worth over $20 billion and anticipates a substantial increase in this figure in the years ahead. China, the world’s second-largest economy, has been contributing double-digit growth to consumer giants like PG, Colgate-Palmolive (CL) and Kimberly-Clark (KMB). Given the country’s massive population and rising income levels, the growth opportunity is very promising.
Under CEO Paul Polman, Unilever aspires to double its revenues within this decade.
We value Unilever at a $35.14 stock price estimate, roughly 10% above its current market price.
About the Site
The facility, which will be located in the Binhai New Area of the northern Chinese city of Tianjin, will produce cleaning products and toothpaste both for China’s domestic market and for export to Northeast Asian countries. In total, the site will house production capacity of roughly 100,000 tons. Phase one of the site’s development is expected to cost about $100 million.
How Does the Investment Affect Unilever?
Local sourcing, manufacturing and distribution could help Unilever compete better on prices with Procter Gamble, which draws substantial business from China and has plans to bolster its position in the region by launching more products.
While capital investment could drain cash in the short-term (2011-2013), the investment positions Unilever to gain share in a high-growth market. Although margins might not expand, volumes should compensate given consumer price sensitivity in the region.
What Is the Potential Impact?
We estimate that Unilever had about a16% market share in fabric care and a nearly 6% market share in oral care in 2010. While we anticipate growth in these numbers over the coming years, towards 17% in fabric care and 7% in oral care, the new production capacity in China could spur the company to out-perform our estimates.
You can drag the trend lines in the interactive charts showcasing fabric care market share (above) and oral care market share (below) to get a sense of the potential impact to Unilever’s stock value.
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