M&A

Turning up the AC

Hillhouse wins investment duel for Gree

Zhang-Lei-w

Hillhouse Capital’s Zhang Lei

Strong leaders listen to good advice. That was what helped an illiterate peasant called Zhu Yuanzhang overthrow China’s Mongol rulers and found the Ming Dynasty in 1368 from his base in Nanjing. The man who became the Hongwu Emperor took heed of a Confucian scholar called Zhu Sheng, who told him: “Build high walls, stock up on rations and don’t be too quick to call yourself king”.

Today it’s a favourite quotation of one of China’s leading private equity investors: Zhang Lei, the founder of Hillhouse Capital. He says he often relays it to entrepreneurs when he invests in their firms.

WiC wonders whether he’s repeated it to another famous Nanjing native, Dong Mingzhu, chairwoman of Gree Electric. Dong, like the Hongwu Emperor before her, is renowned for her strong personality. Or as an editorial in Sina Finance concluded recently: “It’s Dong’s will that drives Gree’s decisions.”

Dong should be listening more to Zhang as Hillhouse has just become Gree’s largest individual shareholder. This follows Zhuhai Sasac’s decision to convene a beauty contest for the 15% stake it held in the air-con manufacturer, which Hillhouse won at the end of October (Sasac will retain a small percentage in Gree after the sale).

Hillhouse first invested in Gree a year after the private equity group was founded in 2005. Now that Zhang has taken a much larger stake, Dong will be hoping that another of his bon mots bears fruit. Zhang’s investment philosophy is also said to be guided by that of his mentor, David Swensen, who runs the Yale Endowment Fund at Zhang’s alma mater. That makes him a fan of providing the best entrepreneurs with long-term capital to realise their vision, which will be important for Dong at a time when she is trying to reshape Gree’s business and diversify away from its reliance on air-conditioners.

So far the efforts haven’t been entirely successful, as WiC has reported. Gree’s first half results cited air-con sales as 82% of revenue.

Prior to Zhuhai Sasac’s disposal, Hillhouse was the company’s eighth largest shareholder with a 0.72% stake. Its bid had been shortlisted by Sasac against Fang Fenglei’s Hopu Investment Management. Hopu was considered a major contender because of its experience with SOEs and the tech sector. Why Hillhouse won the bidding hasn’t been revealed in detail, only how much it will pay – a minimum of Rmb441.7 per share, or Rmb39.8 billion ($5.69 billion) for 900 million shares.

As we wrote in WiC448, Zhuhai Sasac decided to shed most of its stake in Gree after an increasingly loveless relationship of “sharing the same bed with Dong but dreaming of different things for 20 years” as local media commentators put it.

Dong still has a small shareholding of her own in Gree which now has an institutionalised investor base more akin to some multinationals. One of her long-term aims is making Gree a player in the Internet-of-Things (IoT). As such, she’s been trying to build up its chip making capabilities and Gree announced in the summer that it was starting to use some of the chips developed by its joint venture with Tianjin Zhonghuan Semiconductor.

Gree has also purchased a 12.33% stake in Wingtech, a maker of intelligent 5G terminals. In October last year Wingtech forged an Rmb20.2 billion agreement to purchase the Netherlands’ Nexperia (an NXP Semiconductor spinout). However, the deal requires approval by the Council on Foreign Investment in the United States (CFIUS) and the situation has gone quiet since then, prompting speculation that it won’t get the green light.

However, in September Nexperia said it had secured $1.5 billion in credit facilities to part-finance Wingtech’s acquisition.

Dong’s IoT ambitions may be moving ahead, but whether Zhang will ever be able to match with Gree his first and most ambitious move – investing the whole of his $30 million fund in Tencent back in 2005 – seems unlikely. In the meantime, at least Gree’s share price is heading in the right direction: rising 68% over the last year and up nearly 12% since Hillhouse emerged victorious.

Separately, Caixin reports that Hillhouse has dropped out of the roster of top 10 shareholders at rival appliance firm Midea – so it can focus its attentions on Gree.


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