Fear and Greed: The New Era of Chinese Business Nobody Understands

Wanda is racing to sell everything; Tencent is racing to buy everything.

"He founded a real estate company in Dalian and built it into China's largest real estate empire. Lately he's moved into entertainment and sports. He took a stake in Spain's Atlético Madrid; he bought the AMC cinema chain — if you go to the movies, there's a good chance you'll walk into one of his theaters. There's word in the US that he might buy Paramount too. Right now almost everything in entertainment has something to do with him."

That is how Bloomberg editor-in-chief John Micklethwait introduced Wang Jianlin to the audience at Davos in January 2017. Wang said then that he planned to spend another $5 billion to $10 billion that year on overseas acquisitions.

A year later, another Davos has come and gone. Wang Jianlin is no longer holding forth in Switzerland, and the verb most often attached to Wanda has shifted from buying to selling. Last night Wanda announced two deals. Wanda Hotel Development sold its Australian properties on the Gold Coast and in Sydney for AU$315 million in cash (nearly 1.55 billion yuan). After offloading real estate in London and then Australia, Wanda's overseas property now amounts to two sites: Chicago and Los Angeles.

The bigger deal involves the core of Wanda's real estate business: Wanda Commercial sold a 14% stake for 34 billion yuan to a consortium led by Tencent.

Once the new strategic investors are in, Wanda Commercial will be renamed Wanda Commercial Management Group. In its announcement, Wanda said that from now on Wanda Commercial Management will do no real estate development at all, and will wind down within one to two years the property business it grew from, becoming a pure commercial management and operations company.

What did Tencent, with Suning, Sunac and JD.com, buy for 34 billion yuan?

According to the announcement Wanda released on the night of January 29, Tencent Holdings, as lead sponsor, joined Suning, JD.com and Sunac in signing a strategic investment agreement with Wanda Commercial, planning to invest about 34 billion yuan for roughly 14% of the company.

That values Wanda Commercial at 242.9 billion yuan.

As with most of Tencent's big acquisitions before this one, the money did not come from Tencent alone; several partners carried part of the load.

Of the 34 billion yuan, Tencent put up 10 billion yuan for a 4.12% stake. Suning put in 9.5 billion yuan (or the equivalent in Hong Kong dollars) to buy about 3.91% of the shares held by Wanda Commercial's existing shareholders; Sunac put in the same amount for the same slice. JD.com covered the remaining 5 billion yuan.

Worth noting: in 2015 Suning and Alibaba swapped shares and announced a partnership. This time Suning came in as the second-largest investor after Tencent, backing Wanda alongside Tencent.

The money comes with strings. According to Caixin, Wanda made three promises to the investors: that it would not change its core business; that net rental income in 2019 would be no less than 19 billion yuan, or the investors could demand cash compensation; and that it would list on the mainland, in Hong Kong or somewhere else by October 31, 2023.

Wang Jianlin has bought himself another five years to go public.

Wanda's announcement says that as of the end of 2017 it held 31.51 million square meters of commercial space already in operation, with 235 Wanda Plazas across the country and 3.19 billion visits during the year. According to earnings figures Wanda published a few days earlier, Wanda Commercial's 2017 revenue was 112.54 billion yuan.

The promised 19 billion yuan of net rental income will not be easy to hit. Wanda Group's total rental income in 2017 was 25.52 billion yuan, and it is unclear how much of that belongs to Wanda Commercial. That figure is revenue, besides; costs still have to come out of it before you get to net income.

Becoming a commercial management company, Wanda is admitting it lost the bet

Wanda took in 34 billion yuan, but the money does not go to Wanda. It goes to the investors who helped take the company private.

Wanda Commercial first listed on the Hong Kong Stock Exchange, completed a privatization in September 2016, left a depressed Hong Kong market and set out to list on the mainland A-share market instead.

Privatization meant buying back the shares in public circulation, and that meant borrowing. According to 21st Century Business Herald, to assemble the money for the buyout Wanda sent potential investors a document — a bet-on agreement, a contract in which the company guarantees future performance — under which the investors would help it acquire up to 14.41% of Wanda Commercial Properties, exactly the portion not controlled by Wang Jianlin and other mainland shareholders.

At delisting, Wanda Commercial was worth HK$237.68 billion (about 192.4 billion yuan), which put 14% at 27.7 billion yuan. Judging by the terms disclosed this week, Tencent did not get a bargain.

Wanda had no choice but to hand over the shares. When it delisted it promised that if it could not list on the mainland by August 31, 2018, it would buy the shares back at a price guaranteeing domestic investors a 12% annual return and overseas investors 10%. The buyback would also have to absorb interest, bridge financing, letters of commitment, two years of management fees and channel management fees — deductions totaling roughly 16.5% to 20%.

Securities Daily reported last July that the biggest uncertainty in Wanda Commercial's plan to list at home was how it would be classified. Wanda Commercial did not want to be filed under real estate, because real estate listings were all but frozen.

Since the start of this year the China Securities Regulatory Commission has turned down a large batch of listing applicants, and Wanda's A-share debut has receded further into the distance. Wanda Commercial currently sits 59th in the IPO queue.

Tencent and its partners have put up assets worth 34 billion yuan for 14% of Wanda, which amounts to paying off the money Wanda borrowed to go private. Otherwise Wanda would have had to find that sum itself, plus interest and management fees.

What is "new consumption," or "new retail," worth to Tencent?

Wanda and Tencent say the point of the partnership is to "build new consumption that merges online and offline." Tencent, in other words, is doing "new retail" too, under a name different from Alibaba's: finding an offline entrance for a pile of online channels.

Over the past month or so Tencent has taken stakes in Yonghui Superstores and Carrefour. The 10 billion yuan it is spending on Wanda is its third investment in offline retail, and by far its largest.

Before that, everything Tencent bought in commerce was online. JD.com, Vipshop, Meilianhe (the parent of Mogujie and Meilishuo), Pinduoduo — of China's e-commerce companies of any size, the ones that were not Alibaba's had Tencent as a shareholder.

Moving from online to offline, Tencent and Alibaba have taken similar routes through retail, and retail is the newest field where the two meet head-on.

"New retail," the phrase everyone knows, was Alibaba's coinage. Two months ago Alibaba paid 19 billion yuan for a stake in RT-Mart's parent — its latest large bet on Chinese brick-and-mortar supermarkets, after 2.1 billion yuan for Sanjiang, 28.3 billion yuan for Suning and 17.7 billion yuan for Intime. Over four years Alibaba has put more than 70 billion yuan into offline retail.

Tencent, for its part, bought into Yonghui and Carrefour China within two months, and this Wanda deal now ties Wanda, JD.com, Suning and Tencent together.

What was "Alibaba + Suning + Intime" against "Tencent + JD.com" has abruptly become "Alibaba + Intime + Hema" against "Tencent + JD.com + Yonghui + Suning + Carrefour + Wanda + Walmart."

Tencent is not a retailer. Its three most profitable businesses — games, social advertising and membership services — gain nothing directly from offline stores or Wanda's business.

But retail that joins online and offline could become Tencent's next story, after games, social advertising and membership services.

In the first days of 2018, JD.com announced a joint venture with Meilianhe Group, the parent of Meilishuo and Mogujie, to run e-commerce inside WeChat's social network. The company, called Weixuan (WeChat Select), will operate the "shopping" entrance inside WeChat, and it has already begun signing up merchants. Within a single day, twenty WeChat groups opened to take merchant applications filled up.

Nobody wants to miss the traffic WeChat delivers.

Capital markets in both China and the US are excited by this story.

Physical retail is where Amazon has recently poured money and people — $13.7 billion for Whole Foods, for one. That is seen as Amazon's fifth engine of growth, after e-commerce, AWS cloud computing, Prime membership and video.

Alibaba is the same. Everyone at Alibaba, top to bottom, and its partners besides, calls what they are doing "new retail." Once e-commerce could no longer grow at its old pace, internet companies threw their energy and their cash at offline entrances.

Since buying Whole Foods in June 2017, Amazon has added roughly $200 billion in market value.

Today, whether it is money Tencent earns from its core businesses or money it raises by issuing debt, pouring it into mature businesses like games, social and membership services will not buy much real growth. Pouring it into "new retail" — "new consumption," in Tencent's own words — has an uncertain future, but the possibilities there are always larger.

With the commercial banks showing no mercy, Wang Jianlin could not become Li Ka-shing

Both men are real estate tycoons; both ran large mainland businesses while planning investments abroad. In the end Wang Jianlin still could not turn himself into Li Ka-shing.

While Wang Jianlin sells buildings at a discount to Sunac and R&F Properties to raise cash, China's other great property magnate, Li Ka-shing, dumped his China assets and moved the money into the UK, Western Europe and Australia — and watched his fortune climb back toward its all-time peak.

By QDaily's incomplete count, between 2011 and 2017 alone Li Ka-shing sold at least HK$250 billion of mainland and Hong Kong assets.

The 2016 Brexit referendum knocked 30% off the market value of several of his listed companies and dented his personal wealth, but most of that has since come back. Li Ka-shing is now worth about $34 billion, fourth in China.

The difference between the two men is not only who pulled his money out first. It is also the relationship each had with banks.

Companies borrow from banks because they need the money to operate. Banks take deposits from savers, lend to companies that qualify, and earn the spread. It is an utterly ordinary lending relationship.

But Chinese commercial banks do not have full commercial discretion to begin with. Sometimes, to support the local economy, a local commercial bank or the local branch of a national bank will give a company favorable rates and generous credit lines.

Wanda, which now struggles to raise a loan at all, received several billion yuan in credit lines in 2005 from the head offices of ICBC, Agricultural Bank of China and Bank of China. Agricultural Bank's head office went further and applied to the central bank to make Wanda a pilot enterprise for real estate finance. The application was approved.

That allowed Wanda to borrow across regions: projects anywhere in the country could apply for loans in Dalian, cutting out the intermediate steps. Only two real estate companies in the country were approved for the pilot.

"The significance of this approval is not how many lending steps we cut or how much time we saved. More important is that it shows the trust the central financial regulators place in Wanda Group," Wanda said on its website at the time.

In 2015, while Wanda was expanding hard at home and abroad, it signed a head-office-to-head-office strategic cooperation agreement with Chengdu Rural Commercial Bank. Wanda's official line was that "this cooperation will provide strong credit support for Wanda Group's development and construction in Sichuan."

Policy banks — China Development Bank, the Agricultural Development Bank of China, the Export-Import Bank of China — also make lending easy for certain projects. A project manager at a real estate company developing a border-trade city on the China-Myanmar border said local governments go out and find low-interest policy-bank loans for priority projects; in return, the company is expected to deliver tax revenue and jobs once the project is finished.

Wanda's old growth rates are inseparable from bank money.

A visible hand reaches directly into bank decisions. In 2014 People's Daily ran a piece titled "When Culture Joins Hands With Finance, When Finance Gains Culture" (《当文化牵手金融，当金融有了文化》), reporting that Wanda's purchase of the AMC cinema chain in the US, along with several other overseas deals, counted as "key projects for taking culture abroad" and therefore drew strong support from the Export-Import Bank of China, China Development Bank and other financial institutions.

HNA Group, which fell into the same liquidity trouble as Wanda, received verbal support late last year from the heads of the Hainan operations of eight banks, including China Development Bank, the Export-Import Bank of China, China Construction Bank and Bank of Communications. In HNA's own telling, "the leaders present said they would fully implement the guidance of Hainan Deputy Party Secretary and Governor Shen Xiaoming that 'if HNA does well, Hainan does well; if Hainan does well, HNA does even better,' and would continue to give full support to the healthy and stable development of HNA Group's businesses."

When policy directs the flow, bank money arrives fast and leaves just as fast. That is why Wang Jianlin treated the overseas debt crisis — which began with his foreign investments — as a total loss of bank support.

The written directives stopped at overseas investment. In June 2017 the China Banking Regulatory Commission ordered a review of credit risk at Wanda and several other companies, then placed six of Wanda's overseas investment projects, each in the billions of dollars, under supervision; documents about these orders circulated online.

The Wall Street Journal, which saw one of the documents, reported that the measures included the following: companies Wanda had acquired abroad could not raise money from Chinese financial institutions; Wanda could not pledge those companies as collateral for loans from financial institutions; and the acquired companies could not be folded into Wanda's mainland-listed company. If acquisitions Wanda had already made needed more funding, it would not be able to get loans from Chinese banks.

A credit rating downgrade followed, which pushed up Wanda's borrowing costs and triggered an early-repayment clause on an earlier $1.3 billion loan.

Wanda's earlier overseas acquisitions were funded almost entirely with borrowed money. For a $3.1 billion deal ($2.6 billion purchase price plus $500 million of assumed debt), for instance, Wanda borrowed dollars from the overseas branches of several Chinese banks. The method was to pledge yuan assets at home as collateral, issue letters of guarantee, and borrow dollars against them from the overseas branches of Chinese banks.

Once foreign exchange controls tightened, Wanda could no longer move money out quickly to pay down part of that debt, and its overseas businesses did not throw off enough dollar operating cash flow to cover the exposure left by debt-funded expansion. Wanda began shedding its overseas assets.

Selling domestic assets would not let Wang Jianlin move the proceeds abroad to repay debt, and he sold them anyway, clearing out businesses at home from hotels to plazas. His stated reason, offered on many public occasions, was to bring down the debt ratio — even though Wanda's net gearing was already low for a property company, far below peers such as Sunac and Evergrande, which run above 100%.

And by the size of the credit lines banks had given it, Wanda could have kept borrowing to grow. At the end of 2016 its domestic bank credit lines came to about 362.9 billion yuan, down 53.4 billion from 2015. As of June 2017 the total was unchanged and Wanda had drawn about a third of it. The price was pledging 330 billion yuan of property — 80% of the total value of Wanda's investment properties — as collateral for loans from banks, trusts and securities firms.

Clearly Wang Jianlin feared that the money he would need for investment and operations on the mainland could also meet a 180-degree reversal from banks or regulators. That is why he kept selling domestic assets: to lean on bank loans as little as possible from here on.

His judgment looks correct. A little over a month after the Hainan branches of several banks declared their support for HNA, HNA chairman Chen Feng admitted the group had a liquidity problem, and said the fix was to sell overseas assets and find partners to jointly develop the land it holds at home.

At Wanda's year-end meeting in late 2017, Wang Jianlin said the company would keep cutting its debt, "using every capital means to reduce corporate debt," including selling non-core assets, equity deals that preserve control, and managing other companies' assets for them. He also said Wanda would gradually clear all its interest-bearing overseas debt, aiming to "bring corporate debt down to an absolutely safe level" within two to three years.

Selling under fire: does Wang Jianlin have more friends or more "enemies"?

With the banks out of reach, Wang Jianlin's way of raising money has become the fast sale of whatever he holds.

By QDaily's incomplete count, from November 2016 until now Wanda has sold or exited eight large assets at home and abroad, recovering more than 74.6 billion yuan, and has also walked away from bids on several overseas projects.

November 2016: Wanda sold its Madrid project for 2.048 billion yuan.

February 2017: Wanda dropped its 6.86 billion yuan purchase of Dick Clark Productions, which stages the Golden Globes.

June 2017: Wanda sold the Edificio España in Spain for 2.067 billion yuan.

June 2017: Wanda sold the Changbaishan International Resort.

Over half a year in 2017, Wanda cut the registered capital of 84 Wanda Plazas from several hundred million yuan each to a uniform 50 million yuan, pulling back about 40 billion yuan in all.

July 2017: Wanda withdrew from the bidding for Malaysia's Bandar Malaysia project.

July 19, 2017: Wanda sold 13 Wanda Cultural Tourism Cities to Sunac China for 43.844 billion yuan, and transferred a package of 77 hotels to R&F Properties for 19.204 billion yuan.

August 2017: Wanda abandoned a 4.195 billion yuan plan to buy the Nine Elms Square site in London.

August 2017: Wanda announced on its official social media account that it was leaving real estate for good.

August 2017: Wanda sold overseas property in London, Chicago, Sydney and the Gold Coast to Wang Jianlin's private company, Dalian Wanda Commercial.

January 16, 2018: Wanda sold 60% of its London project for 317 million yuan; the buyer, on the project's behalf, also repaid about 1.424 billion yuan owed to Wanda Hotels, for a combined 1.741 billion yuan. Wanda Hong Kong, which holds the other 40%, is selling its share too, at the same per-share price as Wanda Hotel Development's sale.

January 29, 2018: Wanda Commercial and Wanda Hong Kong sold the hotel-and-apartment project on Australia's Gold Coast and the mixed-use complex in Sydney that they owned together, recovering 5.789 billion yuan.

Tencent again: is being greedy when others are fearful really the right moment?

This time it is Tencent again.

Over the past year multinationals have left China in one form or another, in even greater concentration than in 2016. By incomplete count, more than twice as many multinationals pulled out in 2017 as in 2016.

McDonald's sold the business and switched to brand licensing — the owner of its 2,400-plus mainland stores is now CITIC, and its offshore company was even renamed Golden Arches. Kosé, the Japanese cosmetics group behind Sekkisei and Decorté, sold off its Hangzhou production company. Asahi alone, a single Japanese company, sold farms and ranches to New Hope Group early in the year, sold all its shares in Master Kong Beverage mid-year, and sold its stake in Tsingtao Brewery to Fosun at year-end.

The Chinese companies that once bought most aggressively on international markets have pulled back across the board. More and more A-share companies are instead putting the money they raised from share sales into bank wealth-management products; data from Wind shows that listed Chinese companies bought 1.24 trillion yuan of such products last year, 49% more than in 2016.

The one exception is probably Tencent. It turns up everywhere.

Warren Buffett wrote in his 2011 letter to shareholders: "A climate of fear is your friend when investing." In 2008 and 2009, with financial markets in chaos, Buffett's company invested on a large scale, saying that was the ideal time for a real investor.

Tencent looks like the one playing "greedy when others are fearful."

Tencent is the most aggressive investor in China, and it has left the venture capital firms behind. In 2017 it completed at least 113 investments. For three years running, Tencent has made more investments than Alibaba and Baidu combined, and the gap keeps widening.

In every corner of the internet business, the partners Tencent backs have entered every market, including new ones whose prospects are still murky. Tencent invests in new internet companies so aggressively that it amounts to betting on the lead horse in every race.

In 2017 Tencent also moved into carmaking. In March it spent $1.777 billion for 5% of Tesla, becoming its fifth-largest shareholder. At year-end it led a $1 billion round for NIO.

Through 2017 the businesses in Tencent's portfolio also went public in Hong Kong one after another on the strength of the "Tencent concept": China Literature and Yixin both listed on the Hong Kong exchange, and Tencent's healthcare and music businesses are set to list this year.

A run of investments has also carried Tencent back into the e-commerce business it exited three years ago. As early as 2016, Tencent had passed Richard Liu to become JD.com's largest shareholder. With JD.com in tow, it also invested in Vipshop, the third-largest player.

In offline retail, Tencent invested in Yonghui and Carrefour China, and this latest deal brings in Suning as well.

Now it has entered commercial real estate too.

Tencent really does have the money for one investment after another. Its 2017 interim report shows 20.4 billion yuan of cash coming in from core operations in the second quarter alone, and more than 70 billion yuan of cash and equivalents sitting in its bank accounts. Its quarterly operating profit runs several billion yuan above Alibaba's, and it has held growth above 50% for several quarters.

Despite investing furiously through that stretch, its debt ratio ended up about 10 percentage points lower than two years earlier.

Beyond the cash its own operations generate, Tencent borrows cheaply from financial institutions on the strength of its A to A+ ratings. This January it completed several medium-term note issues worth $5 billion in total.

The most expensive was a ten-year bond at about 3.925%; the cheapest, a $1 billion five-year note, at just 2.985%. Tencent could borrow that money, put it straight into wealth-management products and still pocket the spread. It plans to issue another $5 billion of bonds.

As Tencent's investments multiply, they also drift further from its own business. The internet services it backs can grow fast on WeChat's traffic — but a Wanda Plaza?

When 10 billion yuan at a time goes not into your own core business but out to companies with murky prospects, it says something about how hard growth has become.

Cover image from: eucn.co