Profile: CITIC Capital's Hanxi Zhao

Procter & Gamble (P&G) launched a China management training program in the 1990s to nurture local talent that could make its brands resonate with local consumers. Some of those bright young things might still be in residence, but others struck out on their own, using the skills and experience they had accumulated to take the fight to P&G and its foreign peers.

Perfect Diary and HomeFacialPro, Chinese beauty brands renowned for their ability to turn social media presence into sales, were both founded by P&G alumni. Hanxi Zhao, now a senior managing director at CITIC Capital, is a product of the same bootcamp. Rather than create brands, she buys niche foreign players and amplifies their local following. It’s a playbook that is extending across the consumer sphere, from beauty to wellness to food and beverage.

“No one does these training camps anymore, but that’s when I started to develop my passion for consumer products and brands,” Zhao observes. “And the things I learned at P&G have certainly helped me become more effective in a control buyout environment. I can put myself in the entrepreneur or management team’s shoes and speak the same language as them.”

The brand dialogue has been turned on its head since the end of Zhao’s five-year tenure in 2000. International brands used to be the unquestioned thought leaders and arbiters of quality, educating Chinese consumers on the latest trends. Olay might have been a mass-market skincare product in the US, but it debuted in China at the premium end of the spectrum. “You could only get it with guidance on how to use it,” Zhao recalls.

Now, international players don’t have it so easy. China’s cosmetics industry has trebled in size over the past decade, reaching RMB300 billion ($43 billion) last year, which means more for everyone. But local brands are gradually eroding the dominant market position enjoyed by their foreign peers, closing the gap on product quality and proving themselves masters of consumer engagement through digital channels. E-commerce accounts for more than 70% of industry-wide sales.

These changing dynamics are not limited to beauty. Foreign companies across multiple industries have seen China turn from a reliable growth engine into a competitive problem. This has led to a string of divestments, with CITIC picking up the pieces.

However, another aspect of the GP’s portfolio is emerging brands with a China angle. Erno Laszlo and Trilogy – of the US and New Zealand, respectively – have found buyers in Beijing, Shanghai and beyond. LifeStyles, a condom carve-out from Australia’s Ansell, and Lelo, a Swedish intimate lifestyle brand, are doing the same.

These companies are tapping into a China market where consumer preferences are broadening and there is an increasing willingness to seek out brands that speak to individual personalities and lifestyles. Establishing this rapport involves a very different playbook from 20 years ago – omnichannel rather than mono-channel, social media campaigns rather than TV commercials, nuanced market positioning rather than broad brushstroke luxury – but Zhao argues that the fundamentals of storytelling are largely the same.

“To be successful, you must understand your consumers, identify consumer insights, be a problem solver or someone who leads them to realize their aspirations. Those things don’t change,” she says. “But communication channels are changing. It’s not just penetrating Carrefour and Walmart, it is knowing how to play on Tmall, Little Red Book, and TikTok. Local teams are better at leveraging those channels than multinationals because China is leading the way in social e-commerce.”

From the leftfield

Zhao has been with CITIC for 13 years. She is the most senior female investment professional, having joined the firm when it was still a relatively small operation and women were even more of a rarity in private equity. While happy to see other women climbing the ranks across the industry, Zhao tells younger colleagues who ask for career advice to be gender agnostic and not expect special treatment. As a mother of two, all she has asked for – and received from CITIC – is flexibility.

Coming into private equity from outside the traditional, male-dominated routes of investment banking and consulting, and offering a different kind of skillset to the rest, might have helped Zhao establish herself. Born and educated in Wuhan, P&G set the course for a career working with consumer brands and a stint in the US saw those skills deployed in new contexts.

Harvard Business School was the first port of call, motivated in equal parts by an appreciation for systematic training and a desire to experience life overseas. A job at Boston Consulting Group proved short-lived as Zhao stepped off the logical post-business school ladder to pursue a longstanding interest in media with Dow Jones & Company.

“When I got the opportunity to work for the Wall Street Journal, I jumped at it,” she says. “I spent 4-5 years in strategic planning and corporate M&A. At the time, the company was going through the transformation from being a traditional publisher to an online player and it acquired a couple of dotcom platforms like MarketWatch. It was an interesting experience for me: I never got to be a writer, but I got to witness how a media company was run.”

Returning to China was always the ultimate plan, and CITIC was the only job Zhao applied for. She wanted to work in private equity – “What consultants cannot do but private equity investors can do is impact; not just giving presentations, but doing it together with the management team and seeing the results” – and CITIC was one of few domestic buyout players. The firm was actively looking for people with operational backgrounds to build out its value creation function.

A Japanese speaker since university, Zhao was initially placed with the Japan fund, focusing on post-transaction portfolio management. She started doing more frontline work, sourcing and evaluating deals, on joining the team responsible for CITIC’s cross-border funds. Investments were typically partnerships with US private equity firms involving industrial manufacturing companies that needed assistance establishing or managing a China entity.

The cross-border consumer thesis really came into focus with the acquisition of Erno Laszlo in 2016. It was a legacy brand made famous through associations with Marilyn Monroe and Audrey Hepburn, but CITIC found something interesting when poring through the sales figures. Erno Laszlo was unusually popular – often ranking in the top five alongside premium brands – at Holt Renfrew, the Canadian equivalent of Bloomingdales.

“It was because of the high Asian concentration in Toronto and Vancouver. And then 30-35% of the business was already online. Clearly, they were doing something right for young and Asian consumers,” says Zhao. “We revitalized the brand in this part of the world, building the China team, changing the distributor, making the strategy more online-focused. The year we bought it, Double 11 [November 11 shopping festival] sales were RMB1 million. It went to RMB3 million, RMB11 million, RMB33 million and then RMB83 million.”

Similarly, when CITIC invested in Trilogy, the company didn’t realize that about 25% of its business was already coming out of China. While in-country sales were being captured, personal shipments to China – the daigou channel – were not. LifeStyles was generating almost half its revenue from China via local retailers who sourced products through layers of intermediaries.

Horizontals and verticals

The PE firm is developing its consumer thesis horizontally and vertically. A focus on beauty and wellness bled into sexual wellness with LifeStyles and from there into the sensual wellness space, which led to the recent acquisition of Lelo. The normalization of sensual wellness in a China context – the same phenomenon is playing out globally with traditional consumer marketers enter the space and mainstream retailers stocking products – speaks to the broadening of consumer preferences.

“After we closed the deal, I came across a t-shirt with ‘Take your pleasure seriously’ on the front and bought one for each member of the team,” Zhao says. “I think this will always be a niche market, but it is addressing a serious consumer need. The pandemic has helped boost general openness. Lelo’s business is 70% online and most of it is B2C through our own website. There is a perfect correlation between a surge in demand in US and European markets and the lockdowns happening.”

As for vertical expansion, CITIC moved upstream within the cosmetics industry by purchasing Axilone, a Europe-headquartered packaging supplier that derives most of its revenue from China. This was followed by a move downstream with Hangzhou UCO Cosmetics, a digital marketing and e-commerce services provider specializing in beauty and personal care. CITIC sees it as a virtuous cycle. The more touchpoints it has along an industry value chain, the deeper its knowledge, the stronger its networks, and the better its investment judgment.

These chains inevitably extend across borders, which means Zhao often finds herself traveling along axes that connect China to Australia, Japan, the US, and Europe. However, this interdependency was thrown into stark relief by COVID-19.

As a Wuhan native, with family and friends living in the city, Zhao went into overdrive in January and February, trying to source face masks from all over the world for shipment to China. Then in March the supply chains reversed as the pandemic spread and other countries wanted to import personal protective equipment from China.

“It was a reminder that doing good deeds can be difficult,” she observes. “Going through that process, you realize how important the global ecosystem is. Everyone needs it.”

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• Topics
• Greater China
• Buyouts
• Consumer
• GPs
• China
• CITIC Capital