Let me entertain you

The last time a real estate mogul ventured into Hollywood, it was a decided failure.

Having become the biggest commercial landlord in America by installing cinemas in shopping complexes in the 1970s, the late Melvin Simon, founder of the Simon Property Group, tried his hand at making movies. He produced about 25 films but most were flops and the mogul gave up on his new career, describing it as a “a big mistake”. Refocusing on bricks and mortar, Simon Property has since grown into the world’s biggest real estate firm, controlling or partly owning 326 retail properties comprising 241 million square feet. (That equates to six and a half times the size of Central Park in New York.)

Over in China, the Dalian Wanda Group is keen to seize Simon Property’s top spot in the real estate rankings. Its chairman Wang Jianlin, China’s richest man, even benchmarks his own performance against Melvin Simon’s. But ignoring the American mogul’s personal experience of the movie industry, Wang has just declared that he wants to build a Chinese Hollywood.

Does Hollywood take Wang seriously?

Tinseltown will always pay attention when a media tycoon richer than Rupert Murdoch comes calling. Wang started to get noticed last year by acquiring the 346-theatre AMC chain for $2.6 billion (see WiC151). The deal made Wanda the world’s biggest cinema operator. Then last month, Hurun listed Wang as China’s richest man with $22 billion in net worth and on September 22 he threw a party that got the world’s attention. Hollywood A-listers such as Leonardo DiCaprio and Nicole Kidman found themselves parading down the red carpet. Along with talent agents and studio executives, they had turned up to celebrate Wanda’s plan to build the Rmb50 billion ($8.2 billion) Oriental Movie Metropolis, a huge studio complex, in the coastal city of Qingdao.

According to the UK paper The Telegraph, Wang spent Rmb1 billion on staging the event, flying Hollywood’s finest to China in private jets and booking out a 348-room five-star hotel so that the celebrities could enjoy absolute privacy.

Meanwhile, Wanda said the American Academy of Motion Picture Arts and Sciences has agreed to help launch an annual Chinese Oscars – the first time in the Academy’s 86-year history that it has supported a film festival abroad. The decision came just days after a $20 million donation from Wanda was announced.

“It is the beginning of a new era,” John Travolta told media in Qingdao, adding that Hollywood needs cash and China seems to have a lot of it.

Wang describes the Oriental Movie Metropolis as “the biggest-ever single investment in the movie and television industry”, claiming that a number of film and TV giants have already signed up to shoot 30 foreign co-productions there. Wanda’s own production unit will also make 10 movies every year.

When completed in 2017, the site will boast 20 studios, the world’s first underwater stage, a 3,000-seat cinema and a giant banquet hall. It will host an amusement park to rival Disneyland, a hospital, a permanent car show and a 300-berth yacht club.

Perhaps most importantly – for Wanda’s cashflow – it will house eight hotels, mega shopping malls, and the obligatory luxury residential housing complex.

The Oriental Movie Metropolis is just one of a number of Wanda mega complexes under construction in China. Called “cultural-tourism property projects”, Wanda began building them in 2010. The 21CN Business Herald estimates that Wanda has taken on nine ‘huge scale’ projects since then, committing Rmb230 billion of new investment along the way. (Put in perspective, Vanke, China’s largest listed developer, has a Rmb100 billion market capitalisation.)

How big can Wanda grow?

According to its official website, Wanda now operates 71 Wanda Plazas (akin to Simon Property’s regional malls), 38 five-star hotels, 6,000 cinema screens, 57 department stores and 63 karaoke outlets.

Keeping count is a challenge, though. The company claims there will be 120 Wanda Plazas nationwide by 2015, taking its rental property portfolio to 258 million square feet. “We will overtake Simon Property as the world’s biggest real estate firm by assets by the end of next year,” Wang told Guangming Daily.

Speed, according to Wang, is Wanda’s biggest competitive advantage after all. “Unless I retire, Wanda will stick to the existing growth rate,” he told the China Business Journal in another interview, comparing the company’s growth to the biological phenomenon of “cell division”.

In 2002, Wanda’s assets stood at Rmb10 billion. A decade on, they had reached Rmb300 billion, with Rmb142 billion being reported in annual revenue. Wanda plans to grow these figures to Rmb400 billion and Rmb250 billion respectively by 2015.

Wang says Wanda’s assets grew at a rate of 35% annually over the past five years. At this pace Wanda could double in size every 25 months. Is this sustainable?

How does Wanda’s model work?

Not all of Wanda’s announced investments require as much upfront cash as the headline figures.

For instance, Wanda will jumpstart the Oriental Movie Metropolis with a Rmb5 billion investment in residential and commercial properties. Sale proceeds from these peripheral assets (sold off-plan before they are completed) will then be used to help finance the rest of the project.

A similar model is applied at all the Wanda Plazas. When one project is close to completion, its assets are pledged to lenders for fresh bank loans. Wanda then rolls over its funds to build another Plaza in a new city.

This has enabled it to scale-up at a rapid pace. Global brands with an eye on distributing widely in China see it as an ideal partner. Walmart, for one, has 12 of its superstores located in Wanda’s rental properties.

As China’s biggest commercial landlord, Wanda also has the bargaining power to negotiate more favourable leases from its tenants. Typically half of the rental space is leased before a Wanda Plaza commences construction, says the Economic Observer.

Better still, municipal governments are willing to offer incentives (such as cheaper land) to lure Wanda’s investment in the hope of bringing in global brands and retail prestige to their locality.

Why no copycat for Wanda’s model then?

That remains a mystery in China’s real estate market. While other property heavyweights have gone nationwide with residential developments, Wanda seems to occupy unique territory in establishing a national footprint of shopping centres.

Although Wanda uses off-plan sales of residential properties to finance wider development costs, commercial projects generally take longer to generate cash than purely residential ones. That makes it a business that exchanges fairly hefty upfront investment for slower but more stable returns. But as China’s biggest commercial landlord – and the largest unlisted one – Wang doesn’t seem to have lost any sleep over financing. According to the Economic Information Daily, Wanda has signed “strategic cooperation agreements” with all of China’s major commercial banks. Each has pledged to back Wanda with credit facilities up to “several billion yuan”.

Policy banks have helped too. Months before the AMC takeover, the Export-Import Bank of China pledged to fund Wanda’s cultural businesses, as well as its overseas acquisitions. CCB International, the investment banking unit of Construction Bank, also acquired a 5% stake in Wanda’s commercial property unit in 2008 in one of Wanda’s rare fundraisings from private equity investors, the Economic Information Daily said.

Given the major banks usually prefer to lend to state-owned enterprises, that leads some to wonder whether Wanda’s competitive advantage hinges on Wang’s connections with government and Party officials?

Indeed, since 2007 Wang has been a representative at the Party’s National Congress, an elite gathering that elects the powerful Central Committee every five years. Few businessmen enjoy similar office, although Liang Wengen, formerly China’s richest man and chairman of Sany, is another notable member (see WiC123).

Did someone mention Bo Xilai?

Appearing to be close-knit with Party officials isn’t always smart business, mind you. And since March last year, Wang has been at pains to distance himself from the fallen leader: Bo Xilai.

The rise of Wang and Wanda display remarkable overlaps with Bo’s own political career.

Wanda started as a bankrupt state-owned developer in Dalian back in 1988. At that time Bo was a junior politician in the same northeastern city. Wang got his career break just as Bo was climbing the ranks to become Dalian mayor. The two also shared an interest in football. Dalian Wanda became a household name thanks to its all-conquering team (named after the company) which dominated the league in the 1990s.

Wang later sold the franchise to Xu Ming, now a disgraced business crony of Bo. (Read WiC200 and WiC206 for some of our coverage on the Dalian Shide tycoon.)

In 2004, Wanda’s nationwide expansion was briefly hampered by State Council measures designed to slow investment in shopping malls. However, the restrictions were lifted when Bo became the Minister of Commerce. By that time, the ministry had the final say in approving retail projects, as well as vetting the entry of foreign retail chains into China.

So when Bo was arrested in March last year, rumours spread quickly that Dalian tycoons like Wang might be caught in the fallout.

But rather than disappear from the public eye like Shide’s Xu (who was detained by the authorities for corruption), Wang has done the reverse, becoming much more visible. In the past he kept things low-key, rarely granting interviews. But post-Bo, Wang has become much more media-friendly.

Then came the flurry of high-profile foreign acquisitions, including AMC, with Wang rarely out of the headlines. When he bought yacht maker Sunseeker (see WiC199) he even showed off an endorsement letter from the British Prime Minister. Other leading leisure brands are said to be in his sights too (Bloomberg was suggesting last week that Wang could be interested in acquiring the Four Seasons hotel chain, for instance.)

But could this sudden enthusiasm for overseas assets not only be about “business considerations but a political move”, 21CN has asked?

“More and more people now believe it is a hastily arranged re-allocation of assets,” the newspaper suggests.

Questions about how Wanda is financing its growth, as well as Wang’s new appetite for assets overseas, will only grow now that he has taken top spot in the national Rich List. But the real estate mogul is well aware of the growing band of sceptics and has been at pains to distance himself from the political upheavals of the last few months. “Bo Xilai’s case has nothing to do with Dalian Wanda. We rely on the market but not personal connections,” he told media in the Summer Davos conference last month in Dalian (held in a hotel complex developed by Wanda).

“My philosophy is always the same: be close with the government, and distance myself from politics,” Wang said, in an interesting turn of phrase.

If he can maintain the balancing act and continue to grow his company at such a breakneck pace in the years ahead, the Wanda story might even be picked as a plot for one of the first blockbusters to be filmed at China’s new Hollywood.

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