Wanda Was Doing Just Fine in Real Estate. So Why Did It Suddenly Want Out? | Top 15 Annual Reports

The steady rise in property values that Wanda once leaned on could paper over any problem. Now everyone buying into its "asset-light" pitch should beware the mindset of a general on the march — so fixed on the destination he never stops for the rabbits at his feet.

A year earlier, Wanda had worked hard to project maturity and "steady growth." In 2016 it switched registers completely.

Wang Jianlin had made no public bets, and the core business faced no obvious strain. Even so, in March 2016 Wanda's commercial real estate team made a sudden, dramatic move: it cut the full-year sales target for residential units, office buildings, and retail properties by 40%, down to a floor of 100 billion yuan.

This came even as Wanda kept opening more Wanda Plazas and its sellable floor area kept growing — and yet its sales targets for the next few years were not set to rise at all, holding at that same figure. Wanda's new slogan: "asset-light."

Then came mid-year, when Wanda Commercial — which runs the group's commercial real estate business and had been listed in Hong Kong for less than a year — announced it would go private, citing a "market valuation that was too low." It had listed at HK$48 a share; now it was buying the shares back at HK$48. The full set of filings takes most companies more than a year. Wanda did it in six months.

Then came the year's final three months, when Wanda signed a flurry of deals with CITIC Trust, Minsheng Trust, R&F Properties, and others — investment contracts worth 105 billion yuan in all — announcing plans to jointly develop Wanda Plazas, with 30 to be delivered each year over the next three years. Add the self-operated plazas, and yearly openings would reach a staggering 50.

In under ten months, Wang Jianlin had turned a behemoth with total assets of 796.1 billion yuan and annual revenue of 255 billion yuan into an "asset-light" company. At Wanda's annual work report meeting on January 14, he declared the transformation "essentially a success."

When Even Wanda Says It Wants to Go "Asset-Light," Has Its Best Skill — Acquiring Land — Hit a Wall?

In 2016, Wanda opened 50 Wanda Plazas in a single year, the most in more than a decade. Twenty-one of them were the "co-developed" projects mentioned above. The contracts for those had been signed back in late 2014. Plazas that once required collateral and debt to build across the country had, at a stroke, been made "asset-light."

Use other people's money to buy land and put up buildings, then recruit tenants, manage them, and take a cut of future rents — this "asset-light" model was already well established in the hotel business:

Among the chain hotels that blanket the country, properties wholly owned by brands like Hanting and Home Inn are in fact rare. During the industry's boom years, these brands asked little of their franchisees: ideally, land and a building in a good urban location — though cash would do if you had none.

The advantages were obvious: less pressure on capital, lower land-acquisition risk, and a broader reach across the country. But it really didn't feel like Wanda's style.

Remember that just a few years earlier, in China — for residential or commercial property alike — a developer's ability to acquire land and the size of its land bank were still the two most important measures of its strength. Land-acquisition prowess had always been seen as Wanda's core advantage: it secured land remarkably cheaply and remarkably fast, then moved straight into construction without a seam.

You can see this trajectory in the figures Wanda released at its annual work conferences:

Over the past five years, the floor area of properties Wanda Commercial held directly grew more than 20% a year, reaching 32.33 million square meters by the end of 2016. Take a standard 150,000-square-meter footprint per plaza as the benchmark, and by mid-2015 the group's total land bank was large enough to build 550 more Wanda Plazas — two for every fourth- and fifth-tier city in the country, on average.

But land acquisition had a clear ceiling. Everywhere in China, land prices kept climbing; even an operator as skilled as Wanda was paying about 1,300 to 1,400 yuan per square meter. Seven or eight years of large-scale building had also pushed Wanda's main theater of operations down to third-tier cities and lower.

A Wanda Plaza is a vast mixed-use complex — a shopping center, cinema, KTV, children's center, SOHO residences, a retail street, and sometimes a hotel, theme park, or sports venue. Dropping one into these smaller cities was essentially like building a new urban core, or even a whole new district.

And once it was built, who would buy?

In Xishuangbanna, QDaily saw the situation up close: Wanda had single-handedly created a new tourist zone on the edge of this old tourist city. Beyond the large theme park, the heart of the project was still the same standardized Wanda Plaza. The local permanent population was only about 1.16 million, with daily life and work still centered in the old town. However keen people might be on novelty, it could barely support a project this large.

If you didn't want a huge investment stranded as unsold inventory, the only option was to court out-of-towners and tourists — and later in this article we'll come back to how tourism and resort concepts, which look ever more important, tie tightly to the property business.

In any case, the land-acquisition skill that had once been a source of competitive strength had abruptly become a burden for Wanda. Outsiders find it easy to imagine a simple fix: stop buying land, ease the pressure. But for a company as tightly run as Wanda, one so used to cruising in the fast lane, having its most critical department suddenly stop carried far greater hidden risk.

Before We Talk About the "Asset-Light" Turn, It Helps to Look at How Wanda Spent Its Money

Over 14 years, Wanda built 181 Wanda Plazas across China, but its pace was uneven. Not until 2009 did the company find the high-speed rhythm it would become known for:

From that year on, Wanda broke ground on no fewer than 17 new plaza projects each year. An ordinary project took only 22 to 24 months to finish, with half the staff a comparable project at another developer would use.

This became known as "Wanda Speed," long credited as the key reason it could outrun its peers and expand across the country so fast.

The flip side: running so many plaza projects at once demanded very strong cash flow and financing power. Beyond the group's own cash reserves, bank loans and pre-sales of property supplied more than 60% of the development funding for any given plaza. And the collateral Wanda handed the banks for those loans was, again, a string of completed plazas — properties judged to have room to appreciate.

Residential developers could recoup cash quickly and rode the tailwind of soaring home prices. Wanda, weighted toward commercial real estate, had a harder time paying down those debts. By mid-2015 it had already pledged nearly 80% of its investment properties as collateral, leaving only about 60 billion yuan unpledged. And the funds raised against those pledges still couldn't support so much plaza construction.

Wanda's well-known "sell to fund the lease" model looked like it could ease some of the cash pressure: pre-selling office space, retail units, and homes did bring quick returns. But Wanda, having bet right on the timing of commercial development, then ran straight into the glut of unsold inventory unleashed by the building frenzy in third- and fourth-tier cities.

Wanda Commercial's IPO prospectus and interim reports show its inventory turnover ratio was 0.55 in 2013; by the first half of 2015 it had fallen to 0.11. Even at the first-half-2015 pace, Wanda would have needed nearly 10 years to sell through its assets — a job that took only about two years in 2013.

More important, neither the banks nor property investors still believed Wanda could do what it once had: use a single complex like a Wanda Plaza to drive the commercial rhythm of a small or mid-sized city, and so lift land and property values.

Film, Tourism, and Sports Are All Booming. Does That Count as Part of a Successful "Asset-Light" Turn?

In Wang Jianlin's vision, this leader in commercial real estate would, from now on, lead a band of cash-rich but management-poor developers in conquering market after market across the country — while Wanda itself could redeploy the capital it once spent on costly land into better uses: film, tourism, sports, overseas ventures, and other areas that badly needed money.

In entertainment, Wanda had used this approach to build a dominant, top-to-bottom position fast — and, riding the sector's momentum, film looked set to become another major business, alongside real estate, capable of sustaining Wanda's lofty valuation.

But the screens, attractions, and stadiums on which Wanda's transformation rests — isn't every one of them, at bottom, a real estate business?

New lines like film, tourism, and sports were folded into a "cultural group" inside Wanda. In 2016, that segment brought in more than a quarter of the group's total revenue — a strong showing.

Just as the Wanda Plaza is the heart of Wanda Commercial, the heart of Wanda Culture is the movie theater, tightly bound to physical, offline space. Wanda's cinemas have almost never stood apart from a Wanda Plaza. Beyond the box office, the listed Wanda Film Holdings is always happy to report its screen growth in each earnings release:

From 2005 to 2015, Wanda built up 2,100 screens across the country; in 2016 alone, it added another 1,391.

Wanda is also happy to bring up its overseas purchases: content producers like Legendary Entertainment and Dick Clark Productions, the content-and-ticketing platform Mtime, and integrated-marketing firm Propaganda GEM, which adds advertising revenue to the mix.

But most of its acquisitions over the past two years stayed in the offline cinema market: AMC in 2012, Hoyts in 2015, Carmike and Odeon in 2016, plus many smaller domestic chains.

The "Oriental Movie Metropolis" project in Qingdao shows how Wang Jianlin ultimately wants to use these resources: stars and blockbusters are fine if they can stand alone and earn their money back at the box office — but tied to a property project, they also become a way to boost property sales and pull crowds into a mixed-use complex.

The same goes for tourism and sports.

In 2016, Wang Jianlin also spent some time arguing that the group's 20 "Wanda Cities" — its highest-level, most novel, and largest-scale projects — could beat the Disney park newly opened in Shanghai.

Pure sensation-seeking "theme parks," and the ski resorts catching on across China, have always drawn crowds. But add hotels, apartments, and shopping centers — whether in Xishuangbanna, Changbai Mountain, Nanchang, or Wuxi — and these "Wanda Cities" are still the same old Wanda, not much different from the standardized retail and leisure you'd find in any of their urban plazas.

At heart, these are all businesses that run on real estate.

So What Does Wanda's "Asset-Light" Strategy Want Most?

At this year's work report meeting, Wang Jianlin returned to a line he had used long ago: "The highest state of running a business is 'empty-handed karate' — but this isn't fraud. It means having a brand, having the skills, so that others come to you and you make money on your brand alone, without putting in a single yuan."

This "getting something for nothing" model needs not only first-rate brand management but a fully developed financial system to hold it up. In the West, where derivatives markets are highly developed, the brand-management and land parts of a commercial real estate project can be split apart completely — the land packaged into a REIT for investors, while the brand operator uses the proceeds to fund daily operations. It is a win-win.

In 2009, Wanda tried to package assets for a listing in China using this model, but failed. That is one reason that, even after listing Wanda Commercial in Hong Kong, the group kept relying on riskier mechanisms like loans and property sales. The complexity of that financing structure also led several rating agencies to give Wanda Commercial fairly low ratings.

So far, regulators still haven't cleared REITs, but Wanda has begun putting the idea into practice in concrete ways: in the asset-light partnership models it has disclosed, investors earn a steady return by putting in capital or land, while Wanda keeps the option, after a project has run smoothly for a few years, to package and sell it to investors or buy it back itself.

A Wanda Plaza thus becomes a relatively liquid, tradable financial product, paying investors a regular "dividend" based on rental income. For a professional commercial real estate team, as long as the project's tenant mix and brand lineup are good enough to keep rental income rising year after year, this is not an impossible goal.

Becoming a Management Company Sounds Great. But Is Wanda a Good Management Company?

Throughout Wanda's furious expansion, outsiders generally saw no problem with how it recruited tenants and ran its plazas.

After all, the achievement-minded officials cared most about speed — "a full complex finished in 22 months" — and the look of a "fully tenanted opening." Investors whose wealth was rising fast but had nowhere to go needed a stable, large-scale place to put their money. And consumers, whose disposable income was rising by a thousand-odd yuan a year, still had plenty of "consumption upgrade" room left.

The steady rise in property values could paper over every problem — so much so that everyone along the chain took on the mindset of a general on the march, so fixed on the objective that they never stopped for small game along the way.

But what happens when growth slows?

It clearly has. And there is no sign of a recovery any time soon.

Wanda's troubles may have only just begun — and looking solely at the rent it owes investors, they are already considerable.

According to data Wanda Commercial released while it was listed, from 2014 to 2016 the average monthly rent per square meter at its plazas rose only from 85 yuan to 103 yuan. In a typical third-tier city, a prime downtown shopping center should be able to command an average monthly rent of around 300 yuan per square meter.

Wang Jianlin has stressed that rental income carries very high margins and contributes more to net profit. But over the past five years, its share of group revenue rose only gradually, from 3.6% to 7.7%.

Well-run shopping centers typically have tools like rent escalations and higher revenue-share rates after a few years of operation. Given that, a network of Wanda Plazas drawing more than 2 billion visits a year should not be doing this badly. It makes you wonder what kinds of unprofitable brands have actually been filling these complexes in second- and third-tier cities.

For years, one of Wanda's selling points for attracting tenants was turning its low land costs into rents below what rivals charged. It also had a set of self-operated anchor tenants meant to draw heavy foot traffic: cinemas, KTV, department stores, and children's amusement centers.

But over several years of operation, three of those four anchor formats showed clear signs of decline — the cinemas being the exception. Wanda's Da Gexing KTV finally closed all 80-plus of its locations in 2015, and Wanda Department Stores ended in a personal buyout by Wang Jianlin.

Even Wanda's cinema chain — its future "entertainment complex" — may be entering a slower-growth slump this year.

Part of that is the loss of confidence after the box office's high-flying-then-crashing year in 2016. But there is also the structural problem of the lower-tier cities themselves: for all its bustle, the entertainment industry is fundamentally a business built on young people. If those young people only show up at their hometown cinema over the holidays and Spring Festival, who is paying the premium for the IMAX, Dolby, and other high-end technology in Wanda's theaters the rest of the year?

The purchasing power of lower-tier cities is a fatal problem. That is why it has always been extremely hard to persuade high-profile, image-conscious brands to follow Wanda Plazas into third- and fourth-tier cities. What is left in the end — the brands that allied with Wanda — are only the ubiquitous fast-fashion and restaurant chains and the more traditionally run franchise retail stores.

A former mid-level employee at Wanda Department Stores once told QDaily that to keep the "fully tenanted opening" miracle going, Wanda and its merchant tenants had in practice gradually become a single community, showing up together as one packaged bundle in city after city across the country. "It's no longer what you'd call tenant recruitment. Whenever a new Wanda Plaza opens, these brands basically follow along to break into the market together."

That also means they will face the warning signs of an economic slowdown together. When these brands had their eyes on the national market, of course they were glad to conquer it alongside Wanda. But what if they shrink, hunker down for winter, or get thrown into disarray by e-commerce platforms that have already reached lower-tier markets with a wider and cheaper selection?

If Wanda wants to run as a management company, it will have to withstand all of this. Otherwise, what looks like an advantage today will turn into a liability overnight.

If the seemingly effortless, sure-to-succeed path of going "asset-light" actually demands the "heavy" work of managing demanding outside capital, proving its tenant-recruitment and operating chops, and weathering an extremely uncertain industry — can Wang Jianlin really afford to stay light?

Cover image from Wanda Commercial's official website and Wanda Hotels' official website