Chips with everything

Li Dongsheng: it’s a decent deal

TCL Corp started out in the early 1980s as a small state-owned factory. Back then it was known as TTK Corp and it focused on making knock-off TDK cassettes from Japan. By 2015 – when the group completed a management buyout – it had grown into an electronics giant with revenues topping Rmb100 billion ($14.6 billion).

The Huizhou-based company’s long-serving chief executive Li Dongsheng once proclaimed that this extraordinary transformation was “a restructuring without original sin”, a term applied when valuable state-owned assets are siphoned off cheaply by rapacious managers. TCL’s privatisation began as early as 1997, he went on, under the zealous oversight of Huizhou’s Party boss Li Hongzhong (now the Party boss of Tianjin). And all of the company’s executives had made sure to pay their taxes in full on the sales of shares they were granted.

However, in the last few weeks the corporate governance narrative turned more negative as TCL’s boss was accused of selling it on the cheap to a related firm.

This followed a flurry of stock exchange circulars from the Shenzhen-listed firm last month explaining the sale of most of its consumer electronic businesses for Rmb4.76 billion to TCL Industries, a firm privately held by Li and his business allies.

Investors were surprised by the restructuring plan. True, consumer electronics such as household appliances and mobile handsets have become more low-margin businesses in recent years. And as a result, TCL says it wants to focus on producing semiconductors and display technologies. But the sale of much of its traditional business has drawn a sceptical reaction.

“TCL is a national brand with more than 30 years’ history. It is also China’s leading TV maker and a trailblazer of overseas expansion [it took over French firms Thomson and Alcatel in 2003]… Sentimentally, many onlookers may have found it [the sale] unacceptable,” China Entrepreneur, a magazine, noted. “And less than Rmb5 billion for a business that is generating Rmb50 billion in revenue every year? Is it being valued too cheaply? There are also comments suggesting that TCL’s executives are trying to siphon off the company’s assets.”

Over the past month Li and other executives have been busy explaining their plans to both the media and brokerages. For instance, they have explained that the company’s white goods and handset businesses have been saddled with debt and the proposed transaction price equates to 1.6 times the net asset value of the parts of the business for sale. What’s more, the listed company will part with a low-margin business replete with hefty liabilities, including payroll for more than 30,000 factory workers.

Moreover TCL’s brand – valued by some marketing researchers at Rmb88 billion – isn’t included in the deal, the company points out.

Brand value aside, TCL only carried a market value of about Rmb38 billion as of this week, or about 10 times its 2017 earnings.

In comparison, news portal Jiemian notes that BOE Technology, a Shenzhen-listed firm focused on semiconductor and display materials, trades with a price-to-earnings ratio of more than 20.

And though it will mean the loss of around half of the firm’s revenues, TCL’s shareholders approved the restructuring on Monday. Almost all of them voted to go ahead after the company sweetened the deal by promising to raise dividend payouts in future. However, regulators still need to give their blessing.

Li has had an unexpected helping hand from one of TCL’s smartphone competitors, as news emerged this week that Xiaomi spent Rmb150 million buying TCL’s shares on the Shenzhen bourse. Xiaomi now owns less than 0.5% of TCL but insists the investment will help forge a “full-range strategic relationship” between the two – with Lei Jun’s Xiaomi also trying to bulk up in semiconductor design.

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