Over the past two years, overseas mergers and acquisitions by Nanjing Cenbest (SH: 600682) involving large sums of money have attracted wide attention from the market. However, after the exciting show of capital operation, investors are more interested in the following question: after large-scale international mergers and acquisitions, will Nanjing Cenbest give full play to its advantages in business operation and management to help improve the acquired assets' performance? The answer is exactly found in Nanjing Cenbest's latest annual report.

On the night of 29th, Nanjing Cenbest released the 2015 annual report. The established British department store House of Fraser (hereinafter referred to as HoF) enjoys a clear trend of growing turnover during the first full fiscal year after being acquired. Nanjing Cenbest had a net profit of RMB 367 million in 2015.

Acquired assets' performance keeps improving and Nanjing Cenbest's net profit reaches RMB 367 million

The newly released 2015 annual report of Nanjing Cenbest shows that the company had a turnover of RMB 15.853 billion and net profit of RMB 367 million in 2015. Meanwhile, the profit allocation plan is also revealed in the report: based on the company's total equity of 828.0163 million shares on 31 December 2015, a cash dividend of RMB 0.9 (tax included) per 10 shares will be paid to each shareholder. A total of cash dividends of RMB 74.5215 million will be paid.

As 2015 is the first full fiscal year for the established British department store HoF after it was incorporated into Nanjing Cenbest, HoF's performance surely steps into the spotlight. The 2015 annual report of Nanjing Cenbest shows that during the reporting period, while the UK retail sector was in recession, HoF achieved turnover growth through a series of measures. Comparing the 2015 with the 2014 annual reports of Nanjing Cenbest, we can see HoF has grown from suffering the loss all year round in 2014 to basically reaching breakeven in 2015, which shows an increasing trend of its turnover.

According to the statistics from the UK Statistics Authority, the sales in the UK retail industry in 2015 only increased by 1% compared to the number of 2014. According to the British Retail Consortium, the sales numbers of the UK retail industry in 2015 were low. While the economy and the industry were in such a recession, HoF's turnover kept growing. According to the statements of HoF covering the period from 31 January 2015 to 30 January 2016, the company's sales amount increased by 2.7% compared to the last fiscal year, which did better than the general level of the industry.

Reduction of the financial burden is one of the important factors for HoF's growing turnover. In August 2015, Nanjing Cenbest announced that after acquiring HoF, it brought credit refinancing of 400 million GBP to HoF to replace the latter's previous high-yield bonds of 250 million GBP. The average interest rate of the credit refinancing was below 4.9%, far lower than the interest rate of the previous high-yield bonds, which was 8.9%. This measure will largely reduce HoF's financial costs.

"However, the high-yield bonds weren't replaced until August 2015. So during 2015, HoF's financial burden was only reduced for only four months. But it will enjoy low interest rate during the entire 2016." According to an employee of Nanjing Cenbest, the financial costs brought by the credit refinancing of 400 million GBP were all been amortised in 2015, which to some extent decreased HoF's performance that year. "On the one hand, the company will enjoy low interest rate in 2016. On the other hand, no financial costs will be amortised. These two factors together will enable HoF to save financial costs in 2016, which will clearly increase the company's turnover."

Synergy for business operation: laying solid foundation for the turnover growth

HoF, an established company with a history of 167 years saw clear growth in turnover during 2015 because of not only declining financial burden, but the business operation by Nanjing Cenbest after the capital operation to a great extent.

The credit refinancing of 400 million GBP served to not only replace the high-yield bonds, but provide funds for HoF to expand the market. Q4 every year is always a peak selling season for HoF. In preparation for the Christmas season of 2015, HoF has redecorated some stores and upgraded important stores to pave the way for a high turnover. According to Nanjing Cenbest's annual report, HoF gained a turnover of 69.10 million GBP in total during the Black Friday promotion and the highest sales of 20.90 million GBP in a single day, increasing by 9% year-on-year, greatly surpassing its rivalry in the industry. During the week before Christmas, it gained a total turnover of 79.50 million GBP, increasing by 6% year-on-year. Its 12 stores' sales for that week all broke record.

Before that, the depreciation and amortisation of the expenses for luxurious decoration also reduced part of HoF's profits. As to that problem, Nanjing Cenbest had had a plan as early as it began to acquire HoF, which is to invest HoF in e-commerce and decoration. The fast growing online business also contributed to HoF's growing turnover last year. Nanjing Cenbest has introduced the O2O-based business model popular in China into HoF's headquarters, combining online and offline channels. The annual report shows that over the recent years, HoF's sales through the Internet and mobile applications have grown from 174.1 million GBP to 234.9 million GBP, increasing by 34.92%.

In the eyes of a researcher specializing in international mergers and acquisitions, to reach a win-win result in business operation after Nanjing Cenbest acquired HoF, on the one hand, Nanjing Cenbest has to provide resources for HoF to reduce the latter's costs in business operation. On the other hand, the management models and brands of HoF should be used to increase the gross profit of Nanjing Cenbest's business lines in China. The first part has become reality. Reportedly, HoF's design team is based in the UK while the manufacturing lines are in several Asian countries. After acquiring HoF, Nanjing Cenbest uses the resources of its substantial shareholder Sanpower Group to find cheaper ODM suppliers, optimising the efficiency of HoF's supply chain and reducing the costs.

Apart from Nanjing Cenbest's large input for HoF in the preliminary stage, HoF's reward to Nanjing Cenbest later is also worth waiting for. According to what we know, HoF's biggest profit source is the sales of its house brands, of which the gross profit margin reaches as high as over 70%, more than double the amount acquired under the traditional franchise model of Chinese department stores, as a result of a more extended value chain HoF enjoys that covers design, manufacturing and selling. That is exactly Nanjing Cenbest's philosophy about mergers and acquisitions in the very beginning: by introducing HoF's advanced house brands and buyer-based model, break the "commercial lease and franchise" model of traditional department stores and transform into the "commodity operation" model of modern department stores.

"Since the acquisition, on the one hand, Nanjing Cenbest has introduced the incentive mechanism and strategic management control into HoF's management. On the other hand, it has set multiple KPIs for turnovers, costs and others. With both incentives and pressure, HoF's performance in 2015 improved greatly." According to the above-mentioned source from Nanjing Cenbest, the enhancement of improved performance and synergy for business operation in 2016 has laid solid foundation for high turnovers of HoF and Nanjing Cenbest in 2016.

Clear strategies lead to a big harvest for Nanjing Cenbest's mergers and acquisitions

As an established department store, HoF's turnover keeps growing, which also proves Nanjing Cenbest's strategies for overseas mergers and acquisitions are forward-looking. In response to the government's call for "going global", Nanjing Cenbest's controlling shareholder Sanpower Group has been planning plenty of business lines abroad. At a media interview during the NPC and CPPCC sessions this year, Yuan Yafei, Chairman of Sanpower Group explained his philosophy about mergers and acquisitions. On the one hand, by virtue of overseas mergers and acquisitions, Sanpower introduces advanced foreign products, technologies, business models and management systems into China to facilitate transformation and upgrade of business models, meeting both the requirements of China's consumption upgrade and needs of structural reform for the supply front. On the other hand, Sanpower combines the overseas and domestic markets by virtue of overseas mergers and acquisitions, achieving the synergy between industries, complimentary business models and sharing of resources.

"Being able to revive an established store in a traditional industry just proves Nanjing Cenbest's ability to run and manage a business after acquiring it." The above mentioned researcher specializing in international mergers and acquisitions says that the soft power including the ability to run and manage a business can be also applied to other mergers and acquisitions. "So we have reason to believe that the cord blood and senior care businesses Nanjing Cenbest has acquired will do well."

In the early January this year, Nanjing Cenbest announced two private placement plans. It will issue shares and raise earmarked funds to acquire the shares of CO, Shandong Stem Cells Engineering Co., Ltd., An Kang Tong and Natali, ambitiously entering the healthcare and senior care sectors. After the completion of the trades, Natali, a professional health and senior-care service provider based in Israel, and An Kang Tong, one of the advanced Chinese homecare service providers, will both be under control of Nanjing Cenbest. Having acquired CO and Shandong Stem Cells Engineering, Nanjing Cenbest will become the largest cord blood bank of the world.

Compared to traditional commercial assets, Nanjing Cenbest's newly acquired healthcare and senior care businesses enjoy more favourable policies. Following China's transformation into an aging society, the healthcare and senior care industries are seeing their "golden age". Particularly, as "Health China" has become a national strategy, the Broad Health industry has been becoming a new drive for the economic growth of China. While sticking to its previous main business lines, Nanjing Cenbest has been stepping into the emerging industry. According to the company's annual report of 2015, business lines with double drives and diverse business platforms will provide all of the shareholders of the company with more diverse and reliable sources for high turnovers.

Compared to traditional commercial assets, Nanjing Cenbest's newly acquired healthcare and senior care businesses enjoy more favourable policies. Following China's transformation into an aging society, the healthcare and senior care industries are seeing their "golden age". Particularly, as "Health China" has become a national strategy, the Broad Health industry has been becoming a new drive for the economic growth of China. While sticking to its previous main business lines, Nanjing Cenbest has been stepping into the emerging industry. According to the company's annual report of 2015, business lines with double drives and diverse business platforms will provide all of the shareholders of the company with more diverse and reliable sources for high turnovers.