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Pepsi Ups Stake in Chinese Bottler

PEP

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Pepsico Inc. (PEP - Analyst Report) has announced that it will invest 144 million yuan ($22.52 million) for increasing its ownership in its Chinese Bottling Operation– Shenzhen Pepsi, from existing 75% to 90%. Present 25% stakeholder Shen Shenbao Industrial Company has decided to shed 15% of its holding in Shezhen Pepsi, the Pepsi’s subsidiary in China.

Shenzhen PepsiCo earned a net profit of 23.85 million yuan ($88.96 million). However, after 2009, the performance of the company has been less than decent, and in the first quarter of 2012, the company reported a net loss of 8.31 million yuan ($1.29 million).

Shen Shenbao's board considered and has adopted a resolution  to reduce the stake to  10% in Shenzhen Pepsi. Shenshen Bao said that the share transfer will reap a gain of nearly 70 million yuan ($10.94 million). Shen Shenbao plans to use the resources of the divestiture to develop its tea industry.

PepsiCo is trying to claim a bigger slice of profits and directly control its business in the Chinese market. Beijing Pepsi Cola Beverage, established in 1988 with a registered capital of $14.12 million, is a 50-50 joint venture between Pepsi China and Beijing Yiqing.

In 2010, PepsiCo announced plans to invest an additional $2.5 billion in China over the next three years, in addition to the $1 billion investment the company had announced in 2008.

PepsiCo plans to open 10 to 12 new plants in China to manufacture soft drinks, non-carbonated beverages and snacks. The company currently operates 27 beverage and food plants in the country, most of which are joint ventures.

A strong new product pipeline, robust international sales and on-going productivity enhancement initiatives are all positives for PepsiCo. However, we are concerned about Pepsico’s vulnerability to currency translations, and the apprehension that the company could be facing an inflationary impact of approximately $1.4 billion to $1.8 billion.

Currently, we prefer to be ‘Neutral’ on the stock. Furthermore, Pepsi holds  a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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