Wanda Is Finally Going Public. What Makes This Developer Different?

All in all, Wanda is a fairly smart company. Here is what sets it apart.

Dalian Wanda, China's largest commercial property group, formally began its roadshow in Hong Kong on Monday (December 8). Through this Hong Kong initial public offering (IPO), Wanda hopes to raise up to about US$3.9 billion to fund a new round of commercial property construction in 10 Chinese cities. That would make the group the world's second-largest pure commercial property developer.

Wanda plans to issue 600 million new shares at HK$41.8–49.8 each. At the bottom of that range it would raise US$3.23 billion, the largest IPO in Hong Kong so far this year. If the offering hits the full US$3.9 billion target, the group's market value will approach US$25 billion. That would still trail the current world leader in commercial property, the US-based Simon Property Group, at US$56 billion.

But Wanda's ambitions are bigger. The prospectus states plainly that Wanda Commercial Properties expects to challenge for the title of world's largest commercial property developer in 2015. Where does that confidence come from?

Wanda Rode China's Sustained Growth, and the Dividends Behind "Policy"

Wanda Commercial Properties actually launched a plan to list on the A-share market five years ago. Tightening regulation of the property sector and a sluggish capital market forced it to postpone the plan again and again, and finally to abandon it. On September 16 this year, the second week after Alibaba began its roadshow in the United States, Wanda announced it was restarting its IPO. As a giant of offline consumption in China, Wanda has drawn close attention with its plan to list in Hong Kong.

Since the end of 2013, China's property market has looked increasingly tired, and one rescue policy has followed another. The common view is that the era of rapid growth in Chinese real estate is over, and that Wanda Group, as a property company, has already missed its best window for listing.

But look at the wider economy and you will find that Wanda Group read the direction of China's development in recent years correctly, and has fully enjoyed both the continued growth of the Chinese economy and the dividends behind certain "policies."

Of all China's property companies, Wanda may be the one most closely aligned with the national "urbanization" strategy.

Wanda's prospectus shows that as of June 30, 2014, Wanda Commercial Properties had 178 commercial projects in 112 cities across 29 provinces, municipalities and autonomous regions. Its Wanda Plazas, shopping centers and luxury hotels already cover the great majority of China's first- and second-tier cities. But China's current approach to urbanization is to "strictly control the size of megacities" and to focus on "city clusters": building up the second- and third-tier cities around first-tier cities, and moving people out of urban cores into suburbs and satellite towns. As the chart below shows, the floor area of newly started commercial property projects in first-tier cities is falling.

Wanda has adjusted where it invests accordingly and begun to break into emerging cities. Apart from provincial capitals and other regional centers, most of the cities it now picks rank second or third in their province by population and economic output. These cities draw people well, have a strong base of economic activity and consumer spending, and run almost no risk of becoming "ghost cities." With population in first-tier cities strictly capped, they may grow faster than first-tier cities. By building in them, Wanda is better placed to share in the dividends of this round of urbanization.

Wanda Is a Somewhat Different Kind of Property Company

• Strong retail influence, drawing young, fashionable brands

You may deal with this property company not because of property at all, but because of its weight in retail.

From housing and commercial property to the cultural industry, Wanda's chain of businesses looks sprawling, but beneath it lies a strategy that closely follows what city residents want to spend on: housing, shopping, culture, entertainment, travel, leisure... Wanda's businesses touch every part of urban Chinese life, and no other company comes close in this respect.

Among the brands of Wanda Commercial Properties, the biggest star is Wanda Plaza, famous for the saying that "one Wanda Plaza is a downtown in itself." A plaza contains a shopping center, office towers, a hotel, a cinema and more, and each shopping center in turn spans apparel, dining, supermarkets, karaoke, games and other sectors. According to news on the Wanda Plaza website, 104 Wanda Plazas have now opened across the country, drawing more than 1.5 billion visits a year.

The Wanda Plaza name also pulls hard on retail brands. The Wanda Commercial Properties prospectus discloses that as of June 30, 2014, Wanda's brand pool held more than 2,000 brands, many of them well-known domestic and international names in their categories. By tenant mix, anchor and sub-anchor stores account for 14%, children's entertainment and education for 4%, dining for 23%, apparel and related services for 28%, and household goods for 31%. On the whole, the brands it gathers are fairly young and fashionable.

"Wanda Plaza presents itself as a lifestyle plaza, so its leasing logic stresses how different businesses complement one another. It won't raise the share of retail just because retail rents are high. It puts more weight on experience, so entertainment and experiential formats take up a bigger share than in other shopping centers," Zheng Zhihong, head of commercial property services for East China at Cushman & Wakefield, told QDaily. According to Wanda's 2013 work report, the Wanda Plazas that opened last year sharply increased experiential formats, which now make up nearly 55% of a Wanda Plaza. The company plans to raise that share to 60% within three years.

• Selling to fund leasing, with fast cash recovery

Even judged as a pure commercial property company, Wanda's model of "selling to fund leasing" is fairly unusual. In 2013, property sales made up 86.4% of Wanda's revenue, and a gross margin of around 40% guaranteed net cash inflows of 10–20 billion yuan a year. Renting and managing properties brought in only 9.8% of revenue. The point of "selling to fund leasing" is to use the cash from property sales to carry the properties the company holds, so that money comes back quickly.

SOHO China, by contrast, switched from selling everything to holding everything in 2012, and clearly felt the strain of slower cash recovery. Its annual reports show its cash holdings falling steadily, from 19.7 billion yuan at the start of 2013 to 14.1 billion yuan at mid-year and 10.65 billion yuan at year-end. It earned only 279 million yuan in rent in 2013, or 1.91% of operating revenue.

• Low land costs

According to a report by Lande Consulting, Wanda's land costs over the past three years were only 9.18% of its average selling price, a very low figure for the industry. Longfor's land cost in 2013 was 18.2% of its average selling price, and Vanke's was close to 25%. More than 40% of developers were above 33%, and only 6.4% had land costs below 10% of the average selling price.

But Buy Wanda and You Are Still Buying an Asset-Heavy Property Company

The world's largest cinema chain, the world's largest real estate company, the owner of more five-star hotels than anyone else in the world... In each industry, Wanda Group took no more than 15 years to go from newcomer to number one.

Yet for all its global number-one businesses, real estate, the business Wanda was built on, is still its biggest source of revenue. As of 2013, Wanda Commercial Properties had total revenue of 86.8 billion yuan, with a compound growth rate of 30.7%. Contract sales totaled 126.4 billion yuan in 2013 and 56.7 billion yuan in the first half of 2014.

Look closely at Wanda's businesses, though, and you find that department stores, cinemas, hotels and the like almost all grew up on the back of its commercial property. So the weight of commercial property does not conflict with Wanda's push into other fields.

Either way, Wanda remains an asset-heavy company, and its non-property businesses will give it more means to keep acquiring land and expanding project by project. Its biggest problem will be the risk of market saturation and a slowing Chinese economy: the constraint that comes with being "heavy." On top of that, e-commerce's assault on offline retail is another major challenge Wanda must meet.

So Wanda Wants to Become "Lighter," Too

Wang Jianlin, chairman of Wanda Group, who once declared that "Chinese real estate has only a 10-year golden age," has also been eager to shrink the share of the property business. His goal is that, by building up the cultural industry, revenue from traditional real estate, led by commercial property, will fall below 50% of Wanda Group's total revenue within seven years.

• Film and entertainment

As the commercial property business heads for a Hong Kong listing, the recent successful A-share listing of Wanda Cinema Line has also let Wang Jianlin meet this year's goal of "taking one or two companies public."

Wanda Cinema Line began almost by accident. While building facilities for its commercial centers, Wanda Group had planned to bring in an outside cinema chain as a partner, but every negotiation failed, and that is what finally convinced Wanda to build a chain of its own. Now, with the film and entertainment market booming, Wanda Cinema Line is actually seen as a better asset than Wanda Commercial Properties.

According to its prospectus, from 2009 to 2013 Wanda Cinema Line ranked first among China's cinema chains for five straight years in box-office revenue, market share and admissions. The offering is expected to raise 2 billion yuan.

• Culture and sports

When the market was buzzing with reports that Wanda wanted to invest in the Spanish football club Atlético Madrid, we set out 10 reasons the deal might succeed. In fact, Wanda's move into culture and sports is nothing new.

In 1994, Dalian Wanda founded China's first professional football club, Wanda Football Club, which won four championships in six years, a record to match today's high-flying Guangzhou Evergrande. But in 2000, Wanda Group quit while it was ahead, left football altogether, and put all its energy into its core business of property development.

After its great success in commercial property, Wanda turned back to culture, sports and other entertainment projects. Public records show that in 2012 Wanda's annual revenue from the cultural industry had already reached 20.8 billion yuan, and Wang Jianlin has said that Wanda will double that within five years, to more than 40 billion yuan. Pairing the move into culture with overseas expansion also does a good deal to lift Wanda's international image and help it become a world-class multinational.

• E-commerce

The launch of Wanda E-Commerce, funded jointly by Wanda, Baidu and Tencent with 5 billion yuan, made quite a stir this year. About two months later, when the 100th Wanda Plaza opened in Kunming, Yunnan, Wang Jianlin gave an update on the project: "Development is going fairly smoothly, and we haven't hit any difficulties. We still have dozens of software systems in development, and they can't yet be linked into one network. This is very complicated and will take more time. Our plan is a full official launch in the third quarter of next year, rolling out across all 130 projects nationwide before September next year."

In Wanda's transformation, Wanda E-Commerce acts mainly as the "glue" that binds the group's internal resources, including commercial property, culture and tourism. Once the platform takes shape, Wanda will bring more offline businesses onto it as an open platform, turning it into an O2O platform that links offline and online businesses.

Wanda's real aim in e-commerce may not be to fight Taobao, JD.com and other e-commerce companies for a slice of the pie, but to pool its resources and make the pie of its own offline business bigger.

All in All, Wanda Is Still a Smart Company

• Overseas expansion to spread risk

Wanda is expanding globally to offset the risk of a slowing domestic economy. Its sheer scale puts it in the best position to stretch out its period of rapid growth through a global strategy. It has already begun building up overseas property, spending heavily on high-end properties and five-star hotels in the United Kingdom, the United States, Spain, Australia and elsewhere.

• A concentrated, stable ownership structure guarantees Wang Jianlin absolute control

According to the prospectus, Wanda Commercial Properties has a fairly diverse shareholder base, but its largest shareholder and parent company, Dalian Wanda Group, is wholly controlled by Wang Jianlin and his son Wang Sicong through Dalian Hexing, an arrangement that is very rare among listed companies in China.

• Commercial property suffers less from policy controls

Because Wanda focuses on commercial property, macro real estate policy hits it less hard. Since 2005, Chinese real estate has gone through several key market corrections under the influence of a large number of government policies. But national policy has mainly targeted residential projects, to curb investment and speculative demand. Commercial complexes, on the other hand, feed local governments' hunger for GDP, improve a city's image and raise tax revenue. So governments have regulated commercial property, and commercial complexes in particular, fairly loosely, which has driven the sector's continued growth.

Real estate is still a pretty good business. In May this year, a study led by the Enterprise Research Institute of the State Council's Development Research Center showed that listed property companies' results improved steadily in 2013: property companies listed in Shanghai and Shenzhen had average revenue of 5.615 billion yuan, up 30.10% year on year, and mainland property companies listed in Hong Kong averaged 19.437 billion yuan, up 30.08%. Vanke A, listed in Shenzhen, and Evergrande Real Estate, listed in Hong Kong, both showed great overall strength.

Finally, Whether Wang Jianlin Becomes China's Richest Man Doesn't Matter

Once Wanda Commercial Properties lists, its market value will put Wang Jianlin's personal wealth at HK$83.2 billion to HK$98.9 billion. Even adding Wanda Cinema Line, soon to list on the A-share market, his fortune will still lag far behind that of Jack Ma, whose Alibaba listed in the United States at a high valuation.

But since Wanda's department store, culture and finance businesses were all left out of this listing, Wang Jianlin's fortune may still grow.