Two summers ago one of the hottest topics in the Chinese financial markets was the political allegiances of Hong Kong’s richest man. The debate started with an article titled “Don’t let Li Ka-shing run away” in which a Xinhua-run think tank lashed out at the 88 year-old tycoon for being “ungrateful” and deserting his motherland.
A flurry of blistering comments from other state media followed. Their main cause of concern: Li had been shifting his mix of assets towards the UK and elsewhere in Europe, while his flagship company CK Hutchison was divesting from mainland China (see WiC297).
The mood in the Chinese media this month is remarkably similar, although the focus of attention has turned to Wang Jianlin, who is regarded by many as the country’s richest man. Wang’s Wanda Group is one of country’s most acquisitive firms overseas but the property conglomerate’s dealings have also raised concerns that Wang might be attempting to move his money out of China as well.
Suspicions about Wanda’s business model and Wang’s motivations then reached frantic proportions this week after it dropped a bombshell, with its decision to sell its prized hotel and tourism properties in China.
Amidst intense speculation over Wanda’s financial (and political) well-being, articles with a familiar theme – “Don’t let Wang Jianlin run away” – are now making the rounds across social media.
Which assets is Wanda selling?
Wanda last week announced that its property unit, Dalian Wanda Commercial, had agreed to sell a 91% stake in 13 tourism projects and 76 (out of 102) hotels to the Hong Kong-listed developer Sunac China for a combined Rmb63 billion ($9.3 billion).
The deal caught most onlookers by surprise not only because of its size – Chinese media says it is the biggest ever property transaction in the country – but also because of Wang’s willingness to sell.
On Wednesday – with Chinese regulators seemingly joining a growing number of sceptics over the credit risk involved in the megadeal (more on this later) – Wanda came out with another unexpected announcement.
It said it would split the sale into two portions: the tourism projects will be sold to Sunac for Rmb43.8 billion, while the hotel portion will go to Guangzhou-based developer R&F Properties for Rmb19.9 billion.
To underscore how hastily the revised deal was arranged, 21CN Business Herald reported that a press conference had been scheduled at a Beijing hotel for 4pm but when reporters arrived they were told to leave as there would be a one-hour delay.
“Until this point there were still reports that R&F could retreat from joining the deal,” 21CN noted of the aborted event, adding a touch of spice with news that its reporter heard that “someone appeared to have smashed a glass in the VIP room” (perhaps where the final terms were still being thrashed out).
The 13 tourism projects, which are massive commercial-residential developments adjacent to key tourist attractions and theme parks, have a total gross floor area of nearly 59 million square metres – nearly 40 times the size of London’s Hyde Park. (It is unclear from the announcement whether Wang’s flagship Oriental Movie Metropolis is included in the sale.)
Barely a year ago Wang had told the state broadcaster CCTV that these “Wanda cities” were a “pack of wolves” that would defeat the lone “tiger” that he likened to Disney’s Shanghai theme park resort (see WiC327).
The tycoon made plain his desire to best Disney as an entertainment and media conglomerate too, after splurging cash on the AMC cinema chain in the US and Hollywood studio Legendary.
By offloading some of his China-based assets to Sunac and R&F, Wang’s property exposure in China is set to be reduced to 187 commercial malls and several dozen hotels. This is in line with Wanda’s shift to an “asset-light” strategy first announced in 2015 (see WiC267) and it is a relatively common approach among the global hotel chains, which tend to focus on owning the hotel brands rather than the physical real estate, such as rooms. Likewise, Sunac and R&F have promised to keep Wanda’s name on the properties in question after completing the deal.
Why did Wanda pick Sunac?
Immediately before the $9.3 billion deal was made public last week, Sunac’s market capitalisation stood at $7.5 billion. Its value climbed to $8.2 billion this week despite warnings from Hong Kong’s Apple Daily that the 14 year-old firm gives a good impression of “a snake swallowing an elephant”.
The Tianjin-based developer and its founder Sun Hongbin has served as a prolific white knight for its peers over the past six or so years. In 2011 Sunac came to the rescue of Greentown after the Hangzhou firm ran into financial trouble. Four years later it emerged as a high-profile acquirer for Kaisa Group after the Shenzhen developer defaulted on its offshore debts.
In reality Sun bought time for his rivals as both Greentown and Kaisa later backed away from Sunac’s takeover bids. But the setbacks did not deter Sun from dealmaking and Sunac began to break into the top 10 by residential sales three years ago. Last year it was seventh with sales proceeds of Rmb150 billion and Sun told investors that he expects the figure to double this year. In 2016 Sunac also acquired the entire property portfolio of Legend Holdings, the parent firm of computer maker Lenovo, for Rmb14 billion (see WiC341).
In January it ploughed another Rmb15 billion into cash-strapped LeEco (see WiC352), a troubled enterprise with business interests straddling property, media, smartphones and driverless electric cars.
This aggressive shopping spree, according to CBN, has seen Sunac committing almost Rmb100 billion in investment over the past six months. The newspaper adds that Sun has earned the nickname of “the M&A madman” and said that aside from Sunac “it wasn’t easy for Wanda to find someone to take up such a hefty portfolio in one go”.
The new king of debt…
Deleveraging – in both the banking and property sectors – has been a buzzword for the media since the central government made it a policy priority at the beginning of this year. In its wake, some of the most financially geared players have tried to get into tighter shape. China Evergrande, the country’s top seller of residential property last year, saw its share price hit a record high last month after it repaid and retired all its high-yield perpetual bonds (collectively worth more than Rmb100 billion). Sun seems to be taking the opposite approach, although he must know the risks (in an unpleasant precedent, he was forced to sell his first property venture in 2006 to Hong Kong-listed Road King Infrastructure after running into a debt-driven liquidity crisis).
According to Bloomberg, Sunac has already unseated Evergrande as China’s most leveraged property firm. Liabilities climbed 168% to over Rmb250 billion in 2016 and its net gearing ratio is likely to shoot above 300% following the purchase from Wanda (the revised deal has added Rmb45 billion of debt).
Sun told Caixin Weekly that his company is financing the purchase from its own resources, adding that Sunac had more than Rmb90 billion in cash at the end of June.
But in a rather odd structure, and one which raises further questions about its urgency in offloading formerly prized assets, Wanda first said that it planned to access a three-year bank loan of Rmb29.6 billion, or half of the deal’s size, and lend that money to Sunac.
With R&F joining the frame, Sunac won’t be borrowing from Wanda to buy its reduced share of the assets. However, 21CN said Sunac was required to pay a higher price for the tourism projects so that Wanda could sell its hotels to R&F at a 60% discount to their net asset value.
“The deal’s new structure will reduce our debt structure and improve our liquidity,” Sun told reporters on Thursday. “Even if we have to pay for R&F’s price discount [for the hotels]. This is a win-win-win situation.”
Why was Wanda in a hurry to sell?
This was one of the hottest questions in Chinese financial circles over the past fortnight.
China Business Journal points out that the selldown of its property portfolio could be related to Wanda’s plan to relist Dalian Wanda Commercial in the A-share market. Wang has been awaiting the approval of the China Securities Regulatory Commission to go ahead with the deal, and has been frustrated that stock market regulators have been dragging their feet on IPO applications made by highly-geared property firms.
Wang doesn’t have much time to waste. When Wanda took its property unit private in Hong Kong last year, it promised investors (who helped finance the buyout plan) that Dalian Wanda would relist in the A-share market before August 2018, or else they could have their money back, plus annual interest as high as 12%.
Other observers are explaining Wanda’s decision by referencing policy and personnel changes ahead of the key 19th Party Congress this autumn. In this respect, China’s febrile political mood needs to be taken into account. For instance, Apple Daily thinks it’s plausible that Wang’s political backers have lost out in the ongoing power struggle for positions in the soon-to-be- reconstituted Central Committee and Politburo Standing Committee. There have even been rumours that Wang could be embroiled in a probe related to a Dalian official that dates back to the early 1990s when his company got started. There is no material evidence that this is the case, but it has been pointed out that other equally high-powered tycoons have been put under investigation in recent months, such as Wu Xiaohui of Anbang (see WiC371).
Oriental Daily, another Hong Kong newspaper, reiterates that “maintaining stability” is Beijing’s overriding concern in the run-up to its leadership reshuffle. One of the priorities has been stabilising the yuan’s exchange rate and defending the country’s foreign reserves. Another focus is shutting down instances in which companies have been borrowing at home and spending overseas. That appears to have led financial regulators to investigate the extent of the big four state banks’ credit risks to the most aggressive and most leveraged conglomerates including Wanda and Anbang.
When news emerged in late June that Wanda was among several companies being looked into it triggered a “flash crash” in which the bonds and stocks of the various companies dropped. A five-year, Rmb8 billion Wanda Group bond plunged nearly 4% in Shanghai in a single session, while the share price of its Shenzhen-listed cinema unit fell nearly 10%.
The regulatory reaction this time?
Wanda’s asset sale is a demonstration that it is deleveraging but it doesn’t seem to have satisfied regulators. This week another round of rumours ricocheted through the markets that central authorities have told banks to stop providing funding for Wanda’s overseas acquisitions. The speculation was triggered by an image that went viral on social media (before being blocked by censors) which seemed to be a screen-grab of an internal document from the Agricultural Bank of China.
According to the New York Times, the document described two supposed meetings with financial regulators where the bank was told it was forbidden to lend to six of Wanda’s overseas acquisitions, even if they ran into cashflow difficulties.
A number of international news outlets confirmed the document’s legitimacy, with Reuters adding that Wanda has been banned from expatriating cash from its onshore operations to help its offshore units.
One immediate implication for Wang: the proceeds of the sales to Sunac and Guangzhou R&F will have to stay in China.
Sunac is also feeling the wrath of financial regulators, with reports that it is now on the watch-list of overly acquisitive, overly indebted firms, alongside Wanda. Sunac’s share price plunged as much as 13.5% on Tuesday after Jiemian, a news portal, reported that the banks have also received a notice to assess the company’s credit risk as well. Jiemian also reported that a Rmb1.5 billion trust loan has been put on hold by regulators, and the Economic Information newspaper added that a Rmb10 billion Sunac debt issuance in Shanghai has been scrapped as a result of the new guidance.
According to 21CN, this was why Sunac and Wanda had to bring in R&F at the last minute, and perhaps why Wang seemed to be a relieved man at the press conference on Thursday. “Someone has smashed a glass [cup]? This is how rumours spread,” he joked with reporters when asked about the delay. “We were waiting to sign the contracts but the printer was so slow.”
Wang Jianlin’s The Wanda Way is said to be the country’s bestselling book on management theory with 610,000 copies sold since 2015 (although that’s still small fry compared to Xi Jinping’s classic The Governance of China, which has sold 6.25 million copies, WiC notes).
Wang may now need to add a new chapter, having become a seller rather than an acquirer of assets for the first time. The existing Chapter 12 – which is titled ‘Going Global’ – may need a bit of a rewrite too. (In a Talking Point we wrote about Wanda four years ago Wang told China Business Journal that as long as he didn’t retire his firm would double in size every 25 months, leading WiC to ask whether this was sustainable. Recent events suggest it was not.)
Wang must also fend off a rising tide of personal accusations. “The richest Chinese Li Ka-shing began selling down his property portfolio in China three years ago,” a columnist wrote for Sina Finance. “Coincidentally, the biggest commercial landlord in China is now doing the same and preparing to flee China himself… Don’t let Wang Jianlin run away.”
Even state television seemed to share a similar concern, although it did not name Wanda directly and opted to focus on the general picture of stemming capital flight. “Many of the overly irrational direct investments overseas are actually equivalent to the reallocation of assets [out of China],” CCTV claimed. “For those deals which get into trouble, they may even leave a bad impression on our country.”
The state broadcaster then put another high-profile firm in the firing line on Tuesday, attacking Suning, the retail giant, for its $300 million purchase of Italian football club Inter Milan. “This famous club has been making a loss for five years, with total losses amounting to €275.9 million ($321 million). For what purpose would a Chinese company take it over?” asked one of the CCTV hosts. “Some companies are already highly indebted at home, yet they spend lavishly with bank loans abroad … I think many overseas acquisition deals have a low chance of generating cashflow, and I cannot exclude the possibility of money laundering,” advised Yin Zhongli, a researcher with the Chinese Academy of Social Sciences, during the same CCTV programme
When state television airs these sorts of opinions (i.e. accuses tycoons of money laundering) it is a warning sign that this crackdown is far from over.
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