M&A

Cool calculation

Why air-con giant Gree’s invested in a carmaker

Dong Mingzhu

Dong: not a fan of Xiaomi’s Lei Jun

Fortune magazine rates her as the most powerful woman in China. So it was perhaps not very surprising that Dong Mingzhu decided to blaze a trail for International Women’s Day last month with a potentially industry-transforming M&A deal for her company Gree Electric Appliances.

China’s largest air conditioning manufacturer is purchasing the fellow Zhuhai-based company and electric car manufacturer, Yinlong New Energy, plus its troubled Nasdaq-listed battery producer, Altair Nanotechnologies, based in Nevada. The Chinese media believe the as-yet undisclosed price tag may amount to Rmb10 billion ($1.54 billion), i.e. double the valuation Yinlong achieved during two recent fundraising rounds.

Analysts have been generally positive about Gree’s move, given it should help the company develop a new revenue stream at a time when air-conditioner sales are slowing (not to mention putting some of Gree’s Rmb74 billion cash pile to work). In the third quarter, Gree reported a year-on-year revenue decline of 21.8%, although net profits rose 3%.

The new direction may also help Dong with a bet she made with Xiaomi CEO Lei Jun in 2013. As we reported in WiC266, it was not long before Dong began regretting her challenge that Lei Jun should pay her Rmb1 billion if Xiaomi was unable to top Gree’s sales figures within a five-year period. If it did, she vowed to pay him Rmb1 billion.

The following year Gree saw sales rose 16.6% to a record Rmb140 billion. Yet this was nothing compared to a doubling in Xiaomi’s sales to Rmb74 billion. It put the tech start-up well on its way to overtaking the white goods manufacturer.

Dong subsequently claimed the bet had been nullified after Xiaomi moved into the property sector.

Now Gree is looking for growth by trying to progress from its traditional ‘Made in China’ production to smart manufacturing and the ‘Internet-of-Things’ (Created in China). Gree’s first move in this direction came with the launch of a smartphone last spring, which can be integrated with some of its white goods. However, that phone was largely sold to Gree employees.

According to ThePaper.cn Gree’s second-generation smartphone is scheduled to go on general sale this spring. And in a new swipe at Xiaomi, Dong says she is targeting Apple’s iPhone 6 as her competition rather than Lei’s lower-priced products.

Securities Daily hails Dong as a master chess player and believes the Yinlong transaction is complementary with Gree’s strategy. Gree brings large-scale production and sales expertise to a relatively small-scale company. In turn, Yinlong brings R&D capabilities to Gree in sectors where there is already some overlap such as energy storage (i.e. batteries).

In the past, Dong said she wanted to turn Gree into a global brand. She may now have decided that bigger profits can be found in her home market where the electric vehicle industry is a key priority for the Chinese government. As we also reported in WiC316, the government is offering new subsidies to the sector to get five million electric vehicles on the road by 2020.

Based on sales of 331,000 units in 2015, this implies a compound annual growth rate of about 30% over the next four years. Yinlong itself sold 7,000 units in 2015, far below the industry’s leader BYD’s 61,700.

Its biggest niche lies in blade electric buses where it ranks seventh, selling 3,189 in 2015. Tencent Technology says the company is also developing a fourth-generation lithium-titanate battery, which is 40% cheaper but has 30% higher energy density than the prior generation.

Gree’s acquisition may also explain why Altair Nanotechnologies’ share price has rocketed 1,566% so far this year, albeit from $0.01. The company has been plagued by problems since 2014 when its auditor resigned citing irregularities in China.

It prompted a series of class action lawsuits, which do not appear to have been resolved. But the Chinese media speculate Altair will give Dong an entry point into the US capital markets. It remains to be seen what she will make of the country’s litigious investors. In China she was once memorably described as a woman “who doesn’t even spit out the bones when she chews you up”.


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