Banking & Finance

Shock tactics

Gree skips dividend to make big chip investment


China’s iron lady: Dong Mingzhu

Will it be a case of third time lucky for Gree Electric’s Dong Mingzhu? China’s most famous businesswoman has not had much luck diversifying away from the company’s highly lucrative, but equally concentrated, business of selling air conditioners since she took the helm in 2012.

First there was the attempt to develop a smartphone brand, which ended up seeing unwanted handsets sold to employees.

Then there was the decision to move into the electric car industry, which was rebuffed by shareholders, forcing Dong to invest her own money into Zhuhai Yinlong Electric, a battery maker.

And now it seems Dong may be planning to invest in the latest hot new industry, integrated circuits (IC). As we wrote in WiC407, the central government is determined to wean China off its reliance on US semiconductor chips by developing its own producers. Leading private sector companies, including the BAT troika, are also moving into the sector.

For a home appliances company like Gree, Dong sees synergies in chip design. One of the key technological challenges of making the Internet of Things (IoT) a reality is how to develop computer chips for products that emit a small amount of power for long periods of time.

Nothing about the manufacturing of computer chips comes cheap, although Gree had cash (and equivalents) on its balance sheet that amounted to Rmb105.2 billion ($16.5 billion) at the end of 2017. For the past decade, the company’s core air-con business has been so lucrative that Gree has consistently paid out most of its net income as a dividend.

This combination of generous dividend (averaging a 5% yield over the past year) and high growth (net profits were up 45% in 2017), have long made Gree an investor favourite.

At its results announcement shareholders were once again expecting another big dividend payday. Based on 2016’s 70% payout ratio, this would have amounted to Rmb15.7 billion.

But they were shocked after the company abruptly announced that it was scrapping the dividend because it wants to plough the money into new investments like chipmaking instead. And given how much money the company is sitting on, this suggested those proposed investments are likely to be huge.

The reaction was immediate. The Shenzhen-listed stock plunged 9% on the day following the announcement, prompting the exchange to issue a letter asking Gree to explain its rationale for abandoning the dividend and to confirm that it complied with its own articles of association.

Since then, the share price has bounced back and recovered most of its lost ground. However, the company’s investor relations department likely hasn’t heard the last of the complaints over the way that the change to the dividend policy was handled.

There are already signs of backtracking with management now saying it will pay an interim dividend in 2018 without specifying how much. That hasn’t stopped one investment bank from cutting its price target on Gree based on a “corporate governance discount”.

Netizens have been much kinder, with a majority appearing to back the company. Typical was one commentator who said: “The media have totally taken this out of context. Gree’s saying it will invest the money instead. I think that’s ok.” And many remain fans of Dong and her products. “Businesses need a boss like her,” chimed one. “Gree’s air-cons are the best,” added another.

Gree has yet to make further announcements and none are expected until Dong’s own position is clarified. She will come up for re-election this month but there have been murmurs that she might stand down, given that Gree’s biggest shareholder, the Zhuhai branch of Sasac, had attempted to force her out in 2016.

Politically, Dong appears to have the backing of Zhuhai’s new Party boss, who is reported to have said that he rates her so highly he wants all government branches to accommodate whatever she plans to do next.

That said, Dong might want to improve her skills in managing investor expectations.

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