Johnson & Johnson: Chinese Babies First

| About: Johnson & (JNJ)

Though not widely reported, media reports from China suggest that private equity-backed Shanghai Elsker Mother & Baby, a manufacturer of natural baby skincare products, has been acquired by Johnson & Johnson (NYSE:JNJ). Terms of the deal were not disclosed. Exiting investors of Elsker include Shenzhen Maison Capital and Edmond de Rothschild Private Equity China Fund, as well as Elsker founder Xiaokun Liu.

On the other hand, J&J is looking to sell its feminine products business as it eliminates businesses that are not aligned with its growth priorities. The feminine products business makes products such as K-Y lubricant, Stayfree/Carefree pads and o.b. tampons. This became necessary after the unit's revenue declined 9 percent to $1.6 billion in 2012.

Elsker, which produces mother and baby products including shampoos and lotion, distributes its products through international and local supermarket chains such as Wal-Mart (NYSE:WMT) and RT Mart, as well as through specialist mother and baby retailers like Red Baby and Le You.

Johnson & Johnson is already a large player in the infant product market. The deal will help Johnson & Johnson strengthen its status in the Chinese baby cosmetics market, a tantalizingly lucrative one, given the size of the country. Around 18 million babies are born in China each year and the UN expects this rate to be sustained through 2016.

In 2012, Chinese market size of 0~3-year-old infant products hit record RMB200 billion and is growing at a rate of 20% or so. Although growth is slowing, China still has great market potential to attract more foreign investors due to its huge population base. In the upcoming years, China's infant product market is expected to still keep a growth rate of over 15%, with the market size reaching RMB370 billion by 2015.

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Courtesy: ResearchInChina

The retail value of baby and child-specific skin care rose to 2.03 billion yuan by the end of 2011, up about 17.35 percent year-on-year. This number is predicted to reach 4.71 billion yuan by 2016. The online sales for baby care products has been growing faster in China in the last two years than in developed countries in Europe.

J&J already has a market leadership position with a 50% market share in Chinese baby-care products. The rapid development of Elsker was believed to be threatening the leading position of Johnson & Johnson in the baby supplies market. So, the acquisition of Elsker removes a strong competitor of Johnson & Johnson, stabilizing its market share in baby supplies. Now, it can integrate Elsker with the cosmetic brand Dabao, which J&J acquired in 2008.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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