M&A

Here comes the son

Midea heir He Jianfeng is more interested in financial services than fridges

Midea-w

Midea is the world’s biggest appliance producer by sales

When corporate raiders pounced on Piggly Wiggly Stores in the early 1920s, Clarence Saunders was having none of it. The Memphis Maverick, as he was known, had founded America’s first supermarket chain and listed it on the New York Stock Exchange only a year or two earlier.

He decided to buy back as much stock as he could, borrowing $10 million to repel the raiders. “Shall the gambler rule?” he declared in a Wall Street newspaper advertisement. “On a white horse he rides. Bluff is his coat of mail and thus shielded is a yellow heart.”

In China, there are also white horses roaming the Shanghai and Shenzhen stock exchanges. But they are not the short sellers who so upset Saunders (he lost the battle and his company, in case you wondered). They are the Chinese equivalent of US blue chip stocks.

America’s nickname for its most prestigious listed companies is derived from the highest valued chip on a poker table. It would be tempting to see China’s best stocks – so-called white horses – as an analogy to the steed of that colour that first carried Buddhist sutras into China, but in fact it refers to a local investors view that they’re more transparent. The term began being used a few years ago to distinguish them from so-called ‘dark horses’, where the work of murky market insiders made dramatic share price movements at such companies hard to fathom.

Domestic newspapers have recently focused on one particular white horse, Midea, otherwise known as the country’s white goods giant. Its founder and former chairman, He Xianglian, has taken a different tack to Saunders. In mid-May, he sold off a ­­­0.5% personal stake, raising Rmb1.12 billion ($164.9 million).

The size was small in the context of the 34.71% stake he still owns via Midea Holdings and the remaining 0.7% stake he holds in his own name. But the move caused jitters because it was not announced for a number of days and the stock had been riding high for over a year.

Midea and a number of other well-known consumer goods companies have been having a spectacularly good run. And while they’ve all reported good earnings, analysts attribute their outperformance to a rotation out of small caps where regulatory oversight of stock price manipulation is becoming more intense.

Hence while the ChiNext Price Index is down 9.97% year-to-Tuesday’s close, Midea has risen 34.9%, Gree 39.2% and Kweichow Moutai 34.3%. On a 12-month basis, the three have all jumped over 60% and are trading one standard deviation above their five-year averages.

Sina Finance tells its readers that as the controlling shareholder, He was perfectly entitled to “ride or sell the horse”, as long as his dealings and disclosures complied with Chinese regulations. Sohu.com also says, “the market isn’t really suspicious about the belated disclosure. It just didn’t want him to sell at all”.

As we wrote in WiC45, He is one of China’s foremost entrepreneurs and the company he founded in 1968 was also one of the first township enterprises to IPO (for a corporate profile on Midea, download our guide to the Pearl River Delta from our website).

Times Weekly says he still controls the strategic direction at Midea even though he formally stepped down in 2012 and handed the reins to manager Fang Hongbo who had been groomed for the top job for a number of years.

The magazine says what’s less well known is the role He’s offspring still play in Midea. The child in question, He Jianfeng, gained a board seat in 2012, but as Times Weekly elaborates, he’s spent much of the last few years building up a financial empire often with the help of his father’s pulling power at Midea.

The magazine cites one instance in 2004 when Midea purchased shares in a listed entity (Zhejiang Shangfeng Industrial) and then sold them to a company controlled by He junior for exactly the same amount two years later. This entity became Infore Holdings, which He junior has used to purchase a number of stakes in the financial field.

Times Weekly estimates that He father and son have amassed finance sector assets of more than Rmb180 billion including a 9.47% stake in Shunde Rural Commercial Bank, a 25% stake in E-Fund Management and 35.35% of Kaiyuan Securities.

Times Weekly notes that He junior started out in the shadow of his 73 year-old father, acting as a supplier to Midea. However, he gradually became less interested in the white goods sector, indicating to his father that rather than taking over the helm and running the core business, his passion was to branch out into the sexier field of finance. His network of shareholdings has been nicknamed the ‘Invisible Midea’ by the magazine.

Born in 1967 He junior – who rarely gives interviews or appears in public – sold his white goods OEM to Midea for Rmb70 million and began his capital markets operations a year later. More recently he registered Infore in Shenzhen’s Qianhai – an area designated as a new financial district and renminbi trading hub. Infore and Midea-affiliated investment subsidiaries have in all taken stakes in at least 10 financial institutions, according to Time Weekly – assembling the positions quietly and without fanfare.

Media sources such as China Entrepreneur speculate that the elder tycoon’s recent share sale will channel further funds to Infore for more purchases in the banking and finance sector.

Of course, both father and son are not alone in this diversification strategy. A number of private sector tycoons have successfully pushed into finance – an area traditionally restricted to state-owned players – most notably Jack Ma’s Alibaba and Pony Ma’s Tencent.

Back at the mother ship, the Midea conglomerate still remains coy about how it might further partner in the banking field with the founder’s son.

For example, at its investor day last month, Midea was far more at pains to reiterate its evolution into a high-end precision manufacturer: emphasising R&D (a new unit in California), how it will grow its industrial robotics division (via vertical integration of its recent acquisition, Germany’s Kuka) as well as further expand its global footprint (through more acquisitions like its purchase of Toshiba’s white goods unit).

But for local investment bankers, Infore may be the entity to watch in the coming months…


© ChinTell Ltd. All rights reserved.

Brought to you by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.