Evergrande: no longer just a property firm
Sometime around 2008, Albert Yeung, a Hong Kong businessman who owns entertainment-to-property firm Emperor Group, brought Evergrande boss Xu Jiayin to meet Hong Kong real estate tycoon Cheng Yu-tong, who also controls Chow Tai Fook, the world’s largest jewellery chain.
The two struck up a rapport which prompted Cheng to invite the Evergrande chairman to join their regular game of Big Two (a four-player card game favoured by high-stake gamblers, says the Apple Daily).
Later, Cheng served as the key financier in helping Xu overcome the 2008 credit crunch. He also agreed to become a cornerstone investor in Evergrande’s Hong Kong IPO a year later.
Last week, Xu seems to have returned the favour to their introducer, Yeung, as Evergrande announced a HK$950 million ($122 million) takeover of New Media Group, one of Yeung’s less prominent units. The price tag equates to a hefty 200% premium on the takeover target’s pre-deal value, and more than 1,000 times its 2013 earnings.
New Media publishes magazines with travel tips and celebrity gossip. As such, it marks Evergrande’s fifth non-property venture since 2013. Earlier this year, WiC reported that Evergrande had started selling premium bottled water (see WiC242). In July, it acquired the South Korean plastic surgery network WONJIN Aesthetic Surgery Clinic. A month later, it said it would be investing Rmb10 billion ($1.6 billion) in China’s cooking oil and grain markets.
And last month, Evergrande again grabbed headlines for investing $230 million in the US-listed Solar Power, as well as another Hong Kong-listed firm, Guocang Group, as part of its plans to push into the new energy sector.
On top of this, Xu is also running Guangzhou Evergrande – China’s best football team – as well as a movie production firm.
Of course, the property developer’s aggressive diversification is happening at a time when China’s real estate market continues to slow. But not everyone understands the logic behind Evergrande’s grand strategy. “Evergrande’s cumulative investment in non-property businesses has risen substantially in recent years, indicating the company’s increased risk appetite to invest in businesses in which it has little experience,” warns Franco Leung, a vice president and senior analyst at Moody’s.
“These investments will take time to generate meaningful cashflows and in the meantime will consume cash and generate losses over the next 12-18 months,” he added.
Louie Shum from Hong Kong’s Sincere Finance is similarly sceptical about the deal with New Media. “I don’t know what his (Xu’s) big plans are. It’s not like he is going to die if he takes less risky bets,” he told the Apple Daily.
Perhaps Xu is seeking to emulate the commercial strategy of his card game buddy in Hong Kong. Forbes magazine ranks Chow Tai Fook’s Cheng as Hong Kong’s fourth richest man and his conglomerate spans a diverse range of interests from laundries to bus transportation. Yet with Evergrande’s debt level starting to increase (it now stands at 80% of total assets), other analysts are starting to wonder whether Xu ought to be in a M&A mode at all.
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