Market leader

AS Watson, which generated $19.2 billion in revenue last year from some 11,000 outlets worldwide, is already the market leader in personal care in China - a fragmented landscape of mainly small mom-and-pop stores where the top 10 firms control less than 5 percent. AS Watson leads with just a 1.6 percent share of the market that was last year worth $134 billion.

"China has been AS Watson's growth engine, and given the huge growth opportunity and attractive returns, we would expect part of any IPO proceeds to support the expansion of the Watsons franchise there," said Chan. Watsons is the brand under which the health and beauty retailing business operates.

Since 2008, it has tripled its China store count to 1,438, adding more than a store a day on average last year. Its China operating profit has grown four-fold to more than HK$3 billion ($387 million) in that period. The business has a near-20 percent operating margin.

By comparison, Mannings has said it plans to grow its network of stores across China, which stood at 187 last year, while Alliance Boots has struck two deals to expand in China, with one of its partners owning 500 retail stores. State-backed China Resources owns 165 health and beauty Vivo stores in China.

China Resources declined to comment for this article. Dairy Farm and Alliance Boots did not reply to emails seeking comment.

Big deal

Li, dubbed "Superman" in Hong Kong's business center because of his financial record - he built a sprawling ports-to-telecoms empire from a plastic flower business in the 1960s - is targeting fast growing lower-tier cities for his expansion plans across China, said people familiar with the matter. A spokesman for Hutchison Whampoa declined to comment, noting only last week's statement mentioning the AS Watson strategic review.

China accounts for 24 percent of AS Watson's operating profit, but only 13 percent of its retail store count - two thirds of the group's stores are in Europe. Its China health and beauty retailing business recorded 17 percent revenue growth in 2012, the fastest among the group's geographies.

Western Europe's health and beauty retail market shrank 8 percent last year and is forecast to grow just 4 percent by 2015, to around $306 billion, Euromonitor forecasts.

"Certainly, growing organically in China makes a lot of sense given the returns," said CLSA analyst Jonathan Galligan. "They could also build more scale in Southeast Asia and you could see them making acquisitions in retail space in Europe, something they haven't done in size since 2006."

If the strategic review does result in an offering of AS Watson stock, any deal of more than $6 billion would make it Asia Pacific's biggest IPO in three years, according to Thomson Reuters data.

The AS Watson review is the latest move by Li - ranked by Forbes as the eighth richest person in the world, with a near $31 billion fortune - that some commentators have suggested shows he is cutting his exposure to Hong Kong and freeing up cash to invest elsewhere. Last month, Li announced plans to list his Hong Kong power assets in a deal that could raise about $5 billion.