Betting the firm

Tycoon’s son loses his legacy

Hisoar w

Talking to his bookie?

In 1994 director Zhang Yimou released the film To Live, adapted from Yu Hua’s novel Lifetimes. Its protagonist is a wastrel son who loses most of his family’s money in a gambling house. His wife (played by Gong Li) begs him to stop gambling for the sake of their children. Of course, he doesn‘t. Soon Xu Fugui loses his ancestral mansion to a bounder called Long Er.

To Live was set in the 1940s but the real-life tale of Luo Yuhong, former owner of Hisoar Pharmaceutical, bears a striking resemblance to the Xu family saga.

News surfaced this month that Luo has completely sold his stake in Hisoar, the Zhejiang-based pharmaceutical company that his father Luo Bangpeng founded four decades ago. Luo was promoted to the role of company chairman after his father decided to retire in 2010. But it appears that Luo junior wasn’t very interested in overseeing the firm. Stock market filings shows that he started selling down his stake last year, says 21CN Business Herald. It also seemed like he was in a rush to offload his shares given that he wasn’t selling at a high price.

One suspicion was that he might have been desperate for cash. And last week Investors Journal reported that Luo has a gambling habit that has led to debts of more than Rmb500 million ($80.19 million). And in another parallel to the film To Live, the newspaper reckons Luo has been selling his stake to the person who has been lending him money to gamble, another tycoon called Wang Yunfu.

The news has netizens wondering if this is a case of life imitating art: “Is this the real-life story of To Live but played out in the stock market?” one pondered on Sina Weibo.

Others can’t believe that Luo could punt his family’s fortune so quickly. “Don’t people say wealth does not pass three generations? How did Lou manage to lose everything in just four years?” another netizen mused.

Hisoar Pharmaceuticals has been denying the story. A company spokesman also refuted rumours of Luo’s alleged gambling problem, asserting that “there’s no such thing”.

The rival speculation is that Luo sold down his stake because Hisoar is losing money. It makes the ingredients for pharma products. But falling sales in downstream products mean that the market for many of its raw materials has been shrinking. In the third quarter of last year sales for the whole industry dropped 9.5%. Hisoar made a net loss in 2013, the first since it listed in 2006.

The rumours about Luo’s case have made minority shareholders at other firms nervous. Of the country’s 500 richest people, about 60% are more than 50 years old, meaning that many of China’s leading private companies will change hands over the next decade. Some stockholders bosses are worried that the fuerdai – the term for the ‘second-generation of the rich’ – are ill-equipped to take over the family business. The general public also tend to view the fuerdai negatively, associating them with lavish spending and party lifestyles.

The current situation is a concern, concedes New Fortune magazine, because many second-generation entrepreneurs exhaust their family assets within a few years of taking over the business. Research from Joseph Po-Hung Fan, a professor at the Chinese University of Hong Kong, backs that up. He suggests that most of the 200 family firms in his survey suffered significant losses following the handover to the second generation.

Take Li Zhaohui. He took over Shanxi Highsee Iron and Steel Group in 2003 after his father’s assassination. Li was just 22, but in the ensuing years he diversified into a range of other industries. News surfaced in late April that his company is now on the brink of bankruptcy and won’t be able to service its bank loans. Industry observers reckon that Li owes more than Rmb20 billion (for more on this particular case, see WiC232).

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