2014: Wanda Expands While It Tries to Transform. Can Wang Jianlin Win Another Golden Decade?

Top 15 Year in Review: Wanda

It Started With a Bet

Two years ago, Wang Jianlin and Jack Ma, two of China's richest businessmen, made a famous bet.

"In 2022, ten years from now, if e-commerce has 50% of China's retail market, I'll give Jack Ma 100 million yuan. If it doesn't, he pays me 100 million yuan." Wang said this on stage at CCTV's China Economic Person of the Year awards in December 2012, in reply to Ma's claim that e-commerce would all but replace bricks-and-mortar retail.

On one side was China's largest e-commerce platform; on the other, China's largest commercial property developer. Two of the country's most successful businessmen, running two companies each worth hundreds of billions of yuan, were squaring off, online against offline, on stage and behind the scenes.

Ma, famous for his way with words, even turned the bet into something larger. "If Wang Jianlin wins, our whole society loses. A generation of young people loses," he said during the 2013 "Double 11" shopping festival.

Two years on, in 2014, when the bet came up again, Wang and Ma had each completed a major step in building their business empires.

Last September, Alibaba listed on the New York Stock Exchange. Raising US$25 billion, it became the largest IPO in NYSE history, and its market value of US$231.439 billion on the first day of trading put it ahead of Facebook as the world's second-largest internet company, behind only Google. For a while, nobody could touch Jack Ma and Alibaba.

Wang Jianlin's 2014 was no less impressive. Wanda had a year that "caught the eye."

The 100th Wanda Plaza opened in Kunming, and the Wanda Plaza model kept pushing into second- and third-tier cities. Wanda spent more than 10 billion yuan on properties in London, Los Angeles, Chicago, Australia's Gold Coast and elsewhere to grow its overseas business. It put 5 billion yuan into Wanda E-commerce, a venture with Alibaba's biggest rivals, Baidu and Tencent, to try out an O2O (online-to-offline) model inside its existing physical retail network. The 7 billion yuan Wuhan Han Show and Wanda Movie Park opened, taking Wanda into theme parks to challenge Disney...

And most important of all, Wanda Commercial Properties listed on the Hong Kong Stock Exchange, at a market value of HK$215 billion (172 billion yuan).

In 2014, a year when government cooling measures left the property industry plainly worn out, Wanda could make these big moves for two reasons. First, it was not in the same position as other developers hemmed in by policy: because Wanda had moved early into commercial retail property years ago, today's curbs on residential property barely touch it. Second, its shift from commercial property to cultural property had begun to pay off. Since 2010, Wanda has taken on five cultural tourism property projects, in Changbai Mountain, Dalian, Wuhan, Xishuangbanna and Fuzhou, with total investment of 170 billion yuan. And Wang Jianlin has named the 50 billion yuan "Oriental Movie Metropolis" in Qingdao as Wanda's "No. 1 Project" for the next few years.

Meanwhile, the question ordinary people care about, who is China's richest man, has a clear answer.

Thanks to Alibaba's listing, Jack Ma, worth US$19.5 billion, topped the 2014 Forbes mainland China rich list, while Wang Jianlin, the richest man the year before, slipped to fourth. Wanda Commercial's listing at the end of the year did not win him back the top spot.

The two listings also mean very different things for the two companies. Alibaba's came naturally: it uses the capital markets to expand its territory, with no sign of slowing or stopping. Wanda's listing hides too many problems.

Wanda raised HK$28.8 billion (about US$3.7 billion) in all, nearly 60% less than the US$10 billion the market had expected at the top end.

Even so, Wang Jianlin had no choice but to go to the capital markets now.

Hong Kong's Biggest IPO of the Year

On December 23, Wanda Commercial Properties began trading on the Hong Kong Stock Exchange. In the IPO it sold 600 million shares at HK$48 each, raising about HK$28.8 billion (US$3.7 billion) for a market value of HK$215 billion (about US$27.7 billion). It was the largest IPO on the Hong Kong exchange this year.

Wanda is still the most profitable company in China. In 2013, Wanda Commercial Properties had total revenue of 86.8 billion yuan, with compound growth of 30.7%. Its contract sales were 126.4 billion yuan in 2013 and 56.7 billion yuan in the first half of 2014. Net profit in 2013 reached 27.3 billion yuan, more than rival Vanke's 15.12 billion yuan and more than Alibaba's 21.1 billion yuan (US$3.561 billion).

As a property company, Wanda is still "buying land" and "putting up buildings" at speed. In 2013 it had 51.79 million square meters of floor area under construction, up 46% from the year before and close to the total for all of Europe that year. Wanda now owns 178 properties in 112 cities on the mainland, with total floor area of 93.5 million square meters, plus a land bank of 76.7 million square meters. By the end of 2015 it will own more than 25 million square meters of completed properties, more than any other commercial property company in the world.

More important, the ecosystem Wanda has built around its plazas has made it the most competitive brand in commercial property. According to Wanda Commercial's prospectus, as of June 30, 2014, its pool of tenant brands numbered more than 2,000, many of them well-known Chinese and international names in their categories. As over the past 10 years, opening stores in more cities through Wanda Plazas remains the way many brands most like to expand. 104 Wanda Plazas and 1.5 billion visits a year: these numbers keep showing how strongly Wanda pulls in retail brands, and they have become the Wanda ecosystem's "gold-lettered signboard."

Not the Best Time to List

Whether you look at the wider market or at how much the capital markets think Wanda is worth, this was not the best moment for a Wanda IPO. Wang Jianlin had reasons he could not easily say out loud.

Put simply, Wanda has never needed money more than it does now.

To build more properties faster, Wanda Commercial Properties needs more capital. From 2010 and 2011, Wanda began opening plazas more quickly. New Wanda Plazas rose from 17 in 2011 to 19 in 2013, then to 22 in 2014. After 2014, Wanda will keep opening at least 20 Wanda Plazas and 14-15 Wanda hotels a year.

Wanda currently has 88 Wanda Plazas, 54 Wanda hotels and 8 Wanda Cities under development, a far bigger pipeline than its competitors have. China Resources Land plans to complete about 18 new commercial property projects in the next four years, and Joy City Property plans to grow to 20 commercial property projects nationwide in the next five to 10 years.

Add tens of billions of yuan in overseas and cultural property investment, and it is clear how much capital Wanda needs. Yet it does not have enough cash on hand to pay for all of these projects.

According to the prospectus, Wanda Commercial Properties' net cash flow from operating activities has fallen every year since 2011, from as much as 35.9 billion yuan at the start to negative 8.953 billion yuan at the end of June 2014.

To cover the gap, Wanda turned to bank loans. Its new bank loans have risen every year since 2011: 39.478 billion yuan in 2011, 57.47 billion yuan in 2012 and 80.745 billion yuan in 2013. In the first half of 2014 alone, new loans reached 61.497 billion yuan, more than in all of 2012, and the pressure on its finances rose sharply.

That is why raising tens of billions of yuan through a listing mattered so much. A smaller sum is still better than nothing.

Wanda Is China's Economy in Miniature

Wanda is China's economy in miniature: after a long stretch of fast growth, it has run into real "growing pains."

Over the past 10 years, Wanda opened more than 100 Wanda Plazas in dozens of Chinese cities. This "made-to-order commercial property" brought cities thousands of retail brands, new commercial districts, and rising land and housing prices around each plaza. Together these formed a commercial ecosystem of its own.

In the past two years, that ecosystem has come under strain. One reason is that the retailers who depend on Wanda have run into trouble. Partners such as Walmart have, in the last year or two, cut jobs and reorganized on a large scale (scrapping the Northeast region and cutting its six national regions to five), and no longer follow a strategy of "wherever Wanda goes, I go."

"Before 2011, some multinational chains followed us: however many stores you offered them, they opened, and several chains would even fight over one storefront. This year many chains have sharply cut their plans and can't follow us everywhere. Even the 50% that still follow us look a bit stretched." Wang Jianlin noticed this change two years ago and put it in the group's annual work plan as one of the main problems to tackle.

The changing ecosystem has changed the tenant mix. Restaurants have grown to more than 20% of Wanda Plazas, and the share of experience-based spending such as cinemas and KTV has also risen.

Department stores are as thorny a problem as the chains. In 2013, Wanda Department Store was the only business in the group that missed its growth target, and it kept losing money, dragging down the group's results.

And don't forget the bet between Wang Jianlin and Jack Ma we began with. What it really wagers on is how far online sales, led by Taobao, can replace offline retail, represented by Wanda Plazas.

Online sales have surged over the past two years. In 2013, China's online retail transactions reached 1.8851 trillion yuan, up 42.8% from 1.3205 trillion yuan in 2012, and equal to 8.04% of total retail sales of consumer goods. Sales during Taobao's "Double 11" festival, the industry's bellwether, were 19.1 billion, 35 billion and 57.1 billion yuan over the past three years. At the end of last year Wang Jianlin said "the bet is off," and this year he joined the experiment of using e-commerce to build Wanda's O2O business.

China's slowing economy has hurt retail, and e-commerce has changed how people shop. Together they have slammed the brakes on Wanda's fast-moving train.

The Core Problem: Fast Money Is Becoming Slow Money

Even among pure commercial property companies, Wanda's model of "selling property to fund the property it rents out" is unusual.

Wanda's rapid growth depends on this cash-heavy way of operating. It acquires land fast, builds fast and sells property in the shortest possible time, using the cash from sales to support the properties it keeps, so money flows back quickly.

This model guarantees Wanda net cash inflow of 10-20 billion yuan a year, which goes into the next round of land buying and expansion. In 2013, property sales made up 86.4% of Wanda's revenue, while rent and property management made up only 9.8%.

But in the first six months of 2014, things changed. Wanda Commercial Properties' revenue from property sales fell 27% from a year earlier, while leasing income rose to 22% of the total. One-off sales became rent collected year by year, and Wanda's cash came back more slowly.

At the same time, as Wanda shifts from commercial property to cultural tourism property, large projects such as Wanda City and Oriental Movie Metropolis have appeared one after another. Unlike the old assembly line of "one Wanda Plaza every 18 months," these projects usually need more capital and take longer to build and to pay back. Their sales are uncertain, and they test Wanda's ability to manage giant projects.

Wanda is plainly not very confident about them. During Wanda Commercial Properties' listing, it revised its prospectus once. One change removed two companies that would not turn a profit in the short term, Dalian Jinshi Cultural Tourism Investment Co., Ltd. and Xishuangbanna International Resort Development Co., Ltd., from the listed company's assets.

These careful moves bring us back to the central question: can the heart of Wanda's business model, "rolling property development forward on cash flow," keep working?

Because property sales have slowed, Wanda Commercial Properties' operating cash flow now stands at negative 8.95 billion yuan. And because it keeps buying land and investing in new properties, its investing cash flow has also fallen sharply, to negative 20.91 billion yuan in the first half of 2014. With neither providing the company with money, it can only lean on bank loans. Unsurprisingly, Wanda's new bank loans in the first half of 2014 hit another record, at 8.0715 million yuan.

These numbers show plainly that Wang Jianlin and Wanda badly need money.

For Wanda, the next few years will be a painful "business transition period." Whether it gets through will depend on how fast its rental income grows, how much its large cultural tourism projects earn, and what its office buildings, luxury hotels and overseas projects bring in. Only by getting through this transition can Wanda hope to solve its real core problem.

Will Wanda Face a Major Crisis?

Despite all these difficulties, the problems will not plunge Wanda into a serious business crisis for now, and it still has a chance to transform smoothly and begin a second golden decade.

Take the office buildings and luxury hotels Wanda has worked hard to build in recent years. Demand is slowing for now: according to the China Hotel Asset Report released in November by hotel services firm HOTELUP, five-star hotels' operating revenue and annual net profit margins fell every year from 2010 to 2013. But over the long run, as cities grow more commercial and demand for tourism develops, today's fairly modest investment should still pay off well.

Moving beyond retail property and Wanda Plazas into culture, tourist resorts, theme parks and luxury cruise ships can, to a degree, reduce Wanda's exposure to the property cycle and to policy risk. Not keeping all its eggs in one basket also gives Wanda, which is looking for its next source of profit growth, more options and more room to try things and fail.

Cultural tourism property, which is going most smoothly so far, may become Wanda's growth engine for the next several years. On one hand, it serves local governments' wish for "culture" in urban development, and Wanda can use the "tacit understanding" between the two sides to earn bigger commercial gains. On the other, cultural spending will become an important way to reach consumers over the next 10 years. Just look at how many people are talking about Gone with the Bullets (《一步之遥》) and about Chinese box-office numbers.

Even if every new business goes badly, Wanda still has a land bank of more than 91 million square meters, enough to keep Wang Jianlin going for a few years while he works out where to take the company next.

In e-commerce, Wanda's odds are slim, but it still has chips to play and advantages to use. It can, for example, make shopping at Wanda Plazas more pleasant through services such as parking, restaurant booking and movie tickets, and combine internet technology with offline spending to make each Wanda Plaza run more efficiently.

If It Cannot Transform Smoothly, Wanda Could Be in Real Trouble

Of course, if Wanda cannot transform within a few years, a property company like this could run into serious trouble. A property industry swung hard by the economic cycle, together with the disorderly development of commercial property in China, will expose Wanda to many risks it cannot control.

In leasing, steady rental income of the Hong Kong commercial-property kind, even at low returns, would be enough to keep Wanda on a stable path. In the first half of 2014, Wanda's leasing and property management income reached 5.177 billion yuan, but most of that sharp rise came from related-party deals: in 2014, intra-group transactions in leasing and property management fees alone will reach 1.9 billion yuan.

Wanda needs to go further in leasing and keep raising its rental returns.

One benefit of "turning sales into leases" is that it forces Wanda to pay closer attention to consumers, which also helps it stay connected to the online world.

Restaurants, cinemas, KTV and other experience-based businesses all engage consumers more easily, and a good fit between online and offline can make the experience better for customers.

According to Wanda's prospectus, 90% of the money raised in the listing will go to property development projects in Guangyuan, Harbin, Wuhai, Fuyang, Nanning and other cities. But keeping the ability to talk directly with consumers may matter more to Wanda.

In the end, whether Wanda wins or loses its bet with Jack Ma comes down to whether it can connect directly with consumers and stay alert to what they want.

If Wang Jianlin does not think this through, he may end up paying far more than the "100 million yuan" he wagered.