Fallen star

Yinyi founder Xiong Xuqiang

Anbang in Chinese means “giving stability to the country”. Backed by a number of well-connected princelings, the insurer was synonymous with acquisitive Chinese firms’ appetite for international trophy assets. But the owner of the Waldorf Astoria is assuming a new identity: Dajia, which means “everybody”.

Set up last Friday as a holding vehicle, Dajia Insurance is meant to smooth the restructuring of the nationalised insurer. The deleveraging process has been more drawn-out than expected, which has prompted the government to extend its custodian period till next February.

The meteoric rise and equally rapid fall of Anbang is possibly unparalleled (see WiC399). But it is not the only cautionary tale of how corporate China overstretched and piled on debt-laden acquisitions. In fact, Anbang’s mirror image can be seen on a smaller scale throughout the country.

One such casualty is property-cum-automobile conglomerate Yinyi Group, which filed for bankruptcy last month after defaulting on Rmb2.7 billion ($393 million) worth of loans.

In a filing with the Shenzhen bourse, Yinyi, now trading under the inglorious ST tag (aka “special treatment”), says it needs to repay Rmb5.35 billion of outstanding debts, including some callable bonds, by the end of December. Despite the liquidity crunch, the company is not looking to wind itself up. “[Both the parent and the Shenzhen-listed arm] are deemed adaptable to market needs and are worth restructuring,” it says.

Founded in 1994, Yinyi built its fortune on taking over real estate projects that were left uncompleted by troubled developers. According to China Newsweek it focused on its home market of Ningbo, an eastern port city in Zhejiang province. The experience positioned the company perfectly for the real estate boom that came after the abolition of the public housing distribution system in 1998.

In less than two decades Yinyi became one of the best-known developers in Ningbo. It also built a diversified business stretching from trading to materials and logistics. Through a backdoor listing, Yinyi’s property arm went public in 2011.

Yinyi’s boss Xiong Xuqiang, who quit his job as a civil servant and started the company at the age of 38, became Ningbo’s richest person in 2010 with a net worth of Rmb9 billion, according to Hurun.

It was during 2016 – when Yinyi’s share price reached an all-time high – that the company started to shift its focus towards car parts manufacturing. In the same year that Anbang was working on a multi-billion takeover of Starwood Hotels (a chain that owns the W, Westin and Sheraton brands), Yingyi also went on a Rmb12 billion shopping binge abroad, buying US airbag gas generator ARC Group, Belgium’s car transmission producer Punch Powertrain and Japan’s Nippon Aleph, which makes sensors and switching components.

The aggressive dealmaking allowed Yinyi to draw 64% of its income from sales of car parts the following year and boost its total revenue by 29% on the year before. But the good times did not last, with China’s automobile market suffering its first decline in sales in more than two decades in 2018. Both ARC Group and Punch Powertrain, which were consolidated into Yinyi’s major listed unit, suffered. That led to a Rmb1.1 billion decline in Yinyi’s goodwill, and thrust the company into its first full-year loss (see WiC441 for more on how nearly a tenth of A-share companies forecast their results would be dragged down by goodwill impairment in the latest round of earnings announcements).

Yinyi’s crisis was first exposed when Xiong tried to fold Nippon Aleph into the listed arm last August. Instead of using a share-swap as in the previous two asset injections, Xiong financed the deal with private placements and the introduction of a new shareholder Wuzhou Yitai. According to Yinyi’s stock exchange circular, Wuzhou Yitai was backed by China Merchants Bank through an asset management product and private equity fund.

By this stage Xiong and his connected parties had collateralised over 94% of their holdings in Yinyi for loans, with the number of pledges of shares totalling 57 in 2018, according to China Business Journal. The plummeting of Yinyi’s share price, which was down 83% from the 2016 peak as of Wednesday, deepened its liquidity crunch and led to calls for additional collateral, leading to losses for its lenders including ICBC and Bank of China, reports Time Weekly.

Investors who bought wealth management products linked to Yinyi on an internet finance platform run by Everbright Securities, NetEase and HNA are likewise struggling to get their principal repaid, Jiemian reports.

On July 3 a local branch of the China Securities Regulatory Commission issued a penalty notice against Xiong for illicitly deploying as much as Rmb3.45 billion of Yinyi’s funds. “The company’s actual controller overrides internal control. Under such circumstance, the company has lost its independence,” was the verdict of Yu Minggui, a former independent director of Yinyi who resigned in April. “It is impossible to strictly enforce any systemic rules for corporate governance,” he added.

Yinyi is not alone in its financial woes. Onshore bond defaults more than tripled in the first half compared to last year, reaching Rmb66.8 billion, data from Wind shows. But Yinyi’s dramatic collapse does shed further light on just how tangled China’s financial system can be.

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