Wanda, You Don't Have to Be an Internet Company | Top 15 Annual Report

Some companies in this world provide basic services. They never become the talk of the town, but bubbles never toss them up and down either.

In 2015, the occasional tabloid headline aside, Wanda the company was doing quite steadily.

On January 16, at the newly opened Wanda Xishuangbanna Resort, Wang Jianlin reported Wanda's full-year results for 2015: commercial real estate revenue grew 4.4% year-on-year, the cultural group's revenue rose 45.7%, and even Wanda Department Store — which was closing a large number of stores because they performed poorly — still grew revenue 11.1%.

On paper, Wanda had little to worry about. Yet what the outside world saw was anxiety. Wang Jianlin was anxious, and so was Wanda.

The anxiety was about the internet.

That year Wanda threw itself into chasing the internet while scrambling to shield its real estate business from internet disruption. It built Wanda Plazas and launched Wanda e-commerce; it invested in the Xishuangbanna resort and also in Tongcheng Tourism, an online travel site; it kept "Internet+" on its lips and declared it would build an internet empire.

But the internet gave Wanda little in return. Wanda's e-commerce platform had turned into something that sold financial products, and it would not go live until June the following year. Tongcheng Tourism could not match Trip.com Group or Qunar.

And so the question surfaced: did the contradictory Wanda know it was not an internet company?

Still the richest man — but the reason has changed

In October 2015, the Hurun Rich List came out. A year after the Jack Ma family had taken the top spot on the back of Alibaba's IPO, the Wang Jianlin family reclaimed it with a fortune of 220 billion yuan.

What put Wang Jianlin back on top was no longer Wanda Commercial Real Estate — it was Wanda Cinema. From an IPO price of just over 20 yuan a share to around 75 yuan today, Wanda Cinema's total market value approached 90 billion yuan, a major new source of Wang Jianlin's wealth.

Asked why Wanda Cinema was worth so much, Wang Jianlin explained: "Because this is the future. What capital favors is the future."

Capital's favor may be only one side of Wanda's transformation story. The other side is that Wanda Commercial Real Estate had hit a growth ceiling.

In the past, Wanda Commercial Real Estate ran on a model of "selling to fund leasing." By building Wanda Plazas, it created new commercial districts or sub-centers, which drove up the prices of nearby homes and office buildings. Wanda's main revenue came from selling those homes and offices, and the proceeds also subsidized Wanda Plazas and Wanda Hotels.

But the model no longer worked. The wider economy was slowing, homes had stopped selling, and consumer spending was no longer growing fast. First- and second-tier cities had fairly mature infrastructure and needed no more Wanda Plazas. In third- and fourth-tier cities, local spending power and demand were both constrained.

E-commerce had become a rival to Wanda Plazas too. A bet that has been retold many times took place in 2012, when Wang Jianlin declared that if e-commerce took 50% of China's retail market by 2020, he would give Jack Ma 100 million yuan.

The verdict is still out, but e-commerce has clearly become the biggest problem facing Wanda's core business. It has drawn away the foot traffic on which Wanda Plazas depend — apart from eating and watching movies, fewer people go to Wanda Plazas, a fact that needs no elaboration. But it has also drawn away the brands inside Wanda Plazas. Those brands' confidence to open new locations has proved almost impossible to win back, even as rents at these local malls fell to new lows over the past year — lower, in some cases, than the cost of acquiring customers online.

Wanda Plazas needed to keep the foot traffic and the brands that e-commerce was pulling away. Like every retail landlord, they began to push experiential consumption — dining, cinemas, the kinds of things you can only enjoy by being there. Wang Jianlin's new brand after Wanda Plaza is called Wanda Mall, where experiential consumption will make up 70% of the tenant mix.

But there was no clever fix in the end. Wanda was even thinking of dropping the Wanda Plaza business as a heavy burden. In his 2015 work report, Wang Jianlin said Wanda had rolled out an asset-light strategy the previous year: "A large number of investors are willing to provide the land and all the investment; Wanda contributes the brand and handles design, construction, leasing, and operations. Rental income is split 70-30, with 70% going to the investors and 30% to Wanda."

Wanda's tempo and the world's tempo

Among real estate companies, Wanda is known for speed. The average development cycle for a Wanda Plaza, from buying the land to opening, is 22 months, with the fastest at 18 months. Normally, building a commercial real estate project alone takes more than 20 months.

Just as fast was the pace at which Wanda opened new ones. The number of new Wanda Plazas built each year grew from 17 in 2011 to 19 in 2013, then to 22 in 2014. In 2016, Wanda planned to open 50 Wanda Plazas and two Wanda Cultural Tourism Cities.

But outside real estate, Wanda had lost this speed.

There is a story with a touch of dark humor. Last August, at a forum hosted by Suning, Wang Jianlin said he was considering a partnership with Suning. But before he had finished considering it — quite possibly before he had even told Suning he was interested — that same afternoon, in that same venue, Jack Ma walked up and announced that Alibaba would form a comprehensive strategic partnership with Suning Commerce.

To be fair, across 2015 Wanda's investments outside real estate were hardly small — Infront Sports & Media, World Triathlon Corporation, Australia's HOYTS cinema chain, Legendary Entertainment, Atlético Madrid, 99bill, Aeon Life Insurance, Shimao Cinemas, Tongcheng Tourism, and Mtime — spanning film, sports, tourism, and finance.

But look closely, and apart from the sports and cinema deals, none was the best option in its industry.

In the online travel sector where Tongcheng Tourism operates, Baidu invested in Qunar back in 2011, and Alibaba invested in Qyer as early as 2013. 99bill was no giant in internet finance either. Alipay, founded in 2004, had by then grown into Ant Group, valued at over 40 billion US dollars. JD.com had entered finance as far back as 2012, and its valuation already topped 46 billion yuan.

In the end, Wanda was simply too slow — so all the good opportunities in the market had been taken.

This hesitancy showed up even more plainly in Wanda's own e-commerce venture. At the end of 2013, the e-commerce site "Wanhui.com" launched, but it stayed in beta forever. In March 2015, "Wanhui.com" gave way to "Feifan.com." Then in November, Wang Jianlin announced that Wanda's e-commerce platform would not sell goods but financial products instead.

Three years had slipped by. The new plan: the site would finish its technical development by the end of March 2016 and finish testing its business model by the end of June.

The bubbles Wanda made — and the bubbles dragging it along

Let us look more closely at the companies Wanda has invested in. After all, the biggest recent news about Wanda has come from eye-popping investment figures.

Just over two weeks ago, Wanda formally announced it would buy America's Legendary Entertainment for no more than 3.5 billion US dollars in cash. That figure tops the entire share that all film production companies took from China's 44-billion-yuan box office in 2015.

In all likelihood, this is a story of an overvalued investment. Although Legendary has invested in many blockbusters through its ties to Warner Bros. and Universal Pictures, its own production and distribution skills remain weak. The few films it has led — Crimson Peak and The Seventh Son — fared only modestly at the box office and with critics. Only Godzilla was passable, grossing 530 million US dollars and earning a 74 on Rotten Tomatoes.

But Wang Jianlin believed this newly acquired company would surely bring Wanda huge profits. In Wanda's 2015 work report, he said that in 2016 Legendary's revenue would top 4 billion yuan, and at the American entertainment industry's average 16% profit margin, Legendary's profit would come to around 640 million yuan.

The numbers sound large, but this may not be a deal worth making. We need only divide the 3.5-billion-dollar price by a profit of under 100 million dollars to get a price-to-earnings ratio of 36 for Legendary. By comparison, Disney's P/E ratio is only 18.

The higher the P/E ratio, the more likely a company is overvalued. But Legendary's is not the highest. Wanda Cinema's market value is close to 90 billion yuan, with a P/E ratio above 60.

In sports, Wanda has drawn the same scrutiny. It spent 45 million euros to invest in Atlético Madrid, 1 billion euros to acquire Infront Sports & Media, and 650 million US dollars to buy World Triathlon Corporation. In esports, Wang Sicong bought the CCM team in 2011 and then formed Panda TV in 2015. Panda TV was valued at 2.5 billion yuan the moment it launched — while the veteran platforms Zhanqi TV and Douyu TV were valued at just 1 billion and 540 million yuan.

Wanda may have had a hand in making the "bubble." The precedent before us is Japan in the late 1980s: through four years of frenzied global buying, Japan inflated a bubble economy and in the end became its victim. "The Lost Decade" is exactly what that refers to.

But this may also have been a matter of no choice. Acquisition valuations in the internet sector were climbing steadily, and Wanda, the latecomer, had little option but to follow.

The businesses Wanda values — and those it doesn't

About Wanda's future, Wang Jianlin was very upbeat.

He declared he would not count on real estate to drive growth — as long as revenue held at the hundreds-of-billions-of-yuan level, that was enough. Going forward, Wanda would put its main focus on culture, including film, sports, and tourism. "By 2020, the cultural group's target has been revised to revenue of 150 billion yuan and net profit of 12 billion yuan."

Wang Jianlin said the key to reaching this goal lay in the next year or two. The path was still the same: expand scale quickly through acquisitions and build out the industry chain.

Then there was finance. Wang Jianlin's hope for Wanda Financial was that it would "eventually be bigger than both of these two" — the commercial real estate and the cultural group.

Yet though he always seemed extremely generous when making acquisitions, there were businesses Wang Jianlin had no use for. Any e-commerce venture that burned cash struck him as flawed.

In an earlier interview, he said: "What people now call restaurant O2O — I'm not optimistic. It's fake traffic. The moment you stop burning money, the customers leave."

"I'm also not optimistic about ticketing sites. They're all going to die, because they haven't found a profitable business model at all — it's just subsidies."

These negative judgments look at once like self-protection — Wanda is an offline business, and if people and spending move online, Wanda is basically finished — and like self-persuasion, a way to talk himself into joining this new internet world faster. In all likelihood, the harder Wang Jianlin attacks these models, the more anxious he is inside.

How to face the internet — Wanda still hasn't worked it out.

If Wanda could live comfortably off real estate, why wade into the internet's murky water?

Wanda did not have to wade into the internet's murky water. The experience and model it had built up in commercial real estate were enough to make it China's finest property developer. Even as e-commerce pressure grew, the demand for offline shopping — especially experiential consumption like cinemas and dining — would always exist.

But Wanda was going to chase the internet anyway, because land — the lifeblood of the real estate business — is not a freely traded commodity. Policy shapes real estate companies enormously, and unpredictably.

The mass land buying and the flood of new projects during its expansion had left Wanda needing ever more capital. This forced Wanda to grow more aggressive in raising money — listing Wanda Commercial Real Estate at a poor moment, taking on more bank loans, and carrying higher leverage. Normally, a company like Wanda with annual revenue over 100 billion yuan should not face such large risks.

Add to this China's particular market — one dominated by young people, in which the internet's reshaping of society runs ever deeper. Even Wanda could not answer with any certainty: what kinds of spaces do today's young people actually want to live, work, and play in?

The immense risk and uncertainty pushed Wanda toward the internet. But it also lays bare Wanda's failure: as a commercial real estate company, Wanda had not built the kind of strength seen in Hong Kong's commercial landlords.

In mainland China, Hong Kong real estate companies hold land in the best downtown locations, develop their own properties, and draw long-term rent as their most stable revenue. Swire Properties has been in the mainland for fifteen years with only five projects, yet earns rental income of over 1 billion yuan a year.

The office buildings that could have provided long-term rent were instead sold off fast by Wanda, drawn down into one-time revenue to fuel quick expansion. The self-operated commercial real estate business, meant to generate long-term returns, ran into all kinds of problems instead.

So many commercial real estate companies like Wanda began shifting into the office-leasing business. Pan Shiyi's SOHO China was proudest in 2015 of SOHO 3Q, a by-the-week office-space rental concept. SOHO 3Q had ten office locations in Beijing and Shanghai, 6,600 seats, and an occupancy rate steadily above 90%.

At a launch event for SOHO 3Q on the Bund, Pan Shiyi said: "Looking back, I'm very glad we decided three years ago to hold our properties rather than sell them. If we had sold, we'd be sitting on a pile of cash — but that cash would be worth less and less."

Wanda's only answer to its troubles has been one word: speed. But now its attention is clearly elsewhere. It lurches along, having forgotten that it is a company in the traditional sense — not an internet company.

And so it has also forgotten: some companies in this world provide basic services. They never become the talk of the town, but bubbles never toss them up and down either.