Losing the plot

Gome offloads property as it heads towards a loss

Losing the plot

Huang: “Okay then, sell Shangdu”

When the Chinese refer to something as a ‘chicken rib’ the suggestion is that the item in question is being given up with some regret, even though it is plaintasting and unexceptional. That pretty much sums up the recent sale of Shangdu by Gome.

The real estate project was the brainchild of Huang Guangyu, Gome’s founder. The tycoon was once China’s richest man, having built his firm into the leading retailer of electronic goods. Born in poverty to a family of six in the southern city of Shantou, Huang had 100 stores by 2005 and had successfully listed his firm in Hong Kong. This was also the year that he purchased the Shangdu site. Back then he was at the height of his power and ambition, with little inkling that he was soon to be investigated for ‘economic crimes’ that would later see him jailed.

At the time, Huang’s commercial approach was simple. As he told the media: “Once I set the direction, get a fair idea of what I want to do, and a 30% confidence in the undertaking, I’ll take it on, and go for it at full speed… I don’t sit around for another three months until the plan is drafted with perfect punctuation marks.”

This was also the strategy employed as Huang made his bold move into the property market. Seven years ago he paid Rmb805 million for a 600,000-square metre site in southern Beijing, near the Fourth Ring Road. At the time it was the capital city’s biggest real estate project, with Huang envisioning that the Shangdu development would become a new economic hub.

To realise his dream, Huang spent Rmb3.8 billion on Shangdu. The grand plan was to build a new city, centred on what he promised would be Asia’s biggest textile and fashion marketplace. Around this commercial hub he would also develop office buildings, a convention centre, a shopping mall, hotels and – of course – thousands of apartments.

But the location proved to be far from ideal. The Fengtai district has traditionally been an area where Beijing’s poorer residents have lived, and Gome struggled to turn its blueprint for higher-end living into a reality. So unsuccessful has the project proven that its detractors in the industry have nicknamed it ‘Huang’s real estate poison’.

But the tycoon’s emotional attachment to his underperforming development remained unabated and in 2009 he even valued it on Gome’s books at Rmb10 billion. However, that same year Huang was jailed for insider trading. With its founder behind bars Gome’s core business began to struggle too. The retailer soon lost its leading position to rival Suning.

Shangdu increasingly looked like a costly distraction, and this summer Gome’s management faced a more immediate problem. A price war with online retailer 360buy and Suning (see WiC161) was launched, exacerbating an already deteriorating financial situation for Gome. Its first half results aren’t yet out, but the Southern Metropolis Daily reports that the company has warned it will announce its first loss since it listed in Hong Kong.

The deterioration in sales margins – as well as a slowing economy – has made Gome vulnerable and it is looking for cash to weather the downturn. So earlier this month a deal was struck with HNA Group, the highly acquisitive parent company of Hainan Airlines, to offload the massive Shangdu site. The price has not been disclosed but Southern Metropolis Daily says insiders believe Gome sold Shangdu for between Rmb5 billion and Rmb6 billion, a significant discount to its book value.

For Gome the sale smacks of survival strategy. But why would HNA be interested in purchasing Huang’s ‘chicken rib’? Analysts say that a bargain price sweetened the deal but HNA’s longer term plan is to package Shangdu with other parcels of land it owns around Beijing and flip them to a real estate fund.

But the curse of Shangdu continues. Two weeks ago, the former general manager of Gome’s real estate division, Yu Jinyong – who once ran the ill-fated project – was arrested for fraud.

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