MasterCard Counts on China - Analyst Blog

Expanding its presence in high-growth China, MasterCard Inc. (MA) plans to enhance its partnership with China UnionPay and penetrate the debit card market in the region, according to Reuters. China UnionPay is the sole bank card transaction processing company in the region.

UnionPay is the biggest card company globally in terms of card issuance and the second largest brand in the Asia-Pacific region in terms of transaction volume, thereby beating the oldest and globally renowned competitors such as Visa Inc. (V">V).

In September last year, MasterCard had signed a Memorandum of Understanding (MoU) with China UnionPay in order to build a platform whereby both can gain from a collaboration. MasterCard and China UnionPay aims to boost revenue by adding more locations in places where their cards are widely accepted. This will also help MasterCard to better penetrate the China market, while generating healthy growth opportunities for China UnionPay.

It is believed that the joint effort of MasterCard and China UnionPay will make them a dominant player in the over $455 billion personal consumption market, which is expected to grow by about 15% in the next 5-10 years. China UnionPay already has about 1.4 billion debit cards circulating in China while two-thirds of the market opportunity still lie untrapped. This could, therefore, prove to be a significant part of MasterCard's long-term growth strategy.

MasterCard Enters China Upon Visa's Exodus

The teaming with China UnionPay is further beneficial due to the fact that MasterCard would enjoy a competitive advantage, particularly when arch rival Visa had blocked all its international transaction through China UnionPay, effective August 1, 2010. However, Visa's exit leaves behind similar challenges for MasterCard.

Visa has gone to the extent of warning its member institutions with stipulated fines if they go ahead with the UnionPay system. The company also attempts to block its transactions outside China through the UnionPay system. These transactions include both ATM cash services and other card payments.

The decision was ruled out on the back of barriers to trade in China due to political and economic factors. While China enjoys an attractive and fast-growing bank card market, its business and political policies bar foreign companies from penetrating the Chinese market even as government-backed UnionPay seeks to enter newer markets to poach on the market shares of global competitors such as Visa, MasterCard and American Express Co. (AXP">AXP). These one-sided barriers had compelled Visa to take such an action.

However, based on the MoU with MasterCard, China UnionPay may now attempt to open up and be mutually beneficial to its partner. Overall, MasterCard benefits from strong secular demand growth, meaningful international exposure, high barriers, excellent pricing power, risk-free balance sheet and impressive operating leverage.

Also, the above-average earnings growth, strong competitive position and leverage to an eventual economic recovery will result in a relative valuation premium. However, we are concerned about MasterCard's resilience and ability to raise prices, the detrimental after-effects of the Financial Overhaul Act signed in July 2010 and the scope for increasing cash flow.

On Monday, the shares of MasterCard closed at $236.91, up 1.5%, on the New York Stock Exchange.

 
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