January 20, 2015 / 2:45 AM / 5 years ago

UPDATE 3-Itochu, CP Group to invest $10 bln in China's Citic

* Itochu and CP Group to take 20 pct stake in Citic

* Itochu investment is biggest ever by a Japan co into China

* Citic’s shares up 1.5 pct, Itochu’s down 2.5 pct (Adds dateline, company’s comments, details on deal)

By Ritsuko Ando and Lawrence White

TOKYO/HONG KONG, Jan 20 (Reuters) - 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 programme.

Itochu’s investment will be the biggest ever made by a Japanese company into China, and the company emphasised its close relationship with the country that has often had fraught political ties with Tokyo.

China designated Itochu as a “friendly” trading house in 1972, while CP Group also has long track record in the country.

CP Group was the first multinational to invest in China’s agri-business industry in 1979, helping it modernise 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 U.S. 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 capitalisation 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.

Itochu’s shares fell 2.5 percent to 1,207 yen after the announcement, while Citic Ltd shares were up 1.5 percent.

Nomura said it advised Itochu on the deal while Citic was advised by its in-house investment bank Citic Securities. CP Group did not hire an outside advisor. ($1 = 117.6800 yen) ($1 = 7.7525 Hong Kong dollars) (Additional reporting by Yuka Obayashi in Tokyo and Khettiya Jittapong in Bangkok; Editing by Stephen Coates and Rachel Armstrong)

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