20 February 2019

How Wanda avoids whiplash from breakneck expansion

Wanda Group, China’s commercial realty colossus, turned the first sod of a 50 billion yuan (HK$8.17 billion) cultural and tourism complex with much fanfare last month, defying doubts about the company’s financial strength to withstand policy headwinds and uncertainties in the property sector. The project is another bold move following Wanda’s acquisition of movie theater chain AMC and its ambitious plan to build a mixed-use urban complex in downtown London.

As a privately owned entity, it offers outsiders few clues to its financial health, but some analysts put its gearing ratio at up to 70 percent.

Wanda’s hefty leverage and seemingly reckless expansion have raised widespread questions about whether the company can handle such breakneck growth. The company has 53 large-scale realty commercial projects under way nationwide, with each Wanda Plaza typically encompassing a floor area of no less than 300,000 square meters (sqm).

But company chairman Wang Jianlin {王健林}, also mainland China’s richest man according to Bloomberg, simply shrugs off these concerns when confronted by the media. As he puts it, “cash flow is more crucial than gearing ratio” for Wanda. In other words, he knows what he is doing.

To make his point, Wang cites the downfall of bankrupt US energy giant Enron Corp., which had a gearing ratio constantly below 20 percent as shown in its financial reports but became insolvent in just two months after its cash flow dried up. Wang is effectively saying that gearing ratio is not necessarily the key to corporate financial health.

Wang responds to concerns about the large number of ongoing projects and their financial burden with a firm rebuttal, saying the scale and speed are precisely Wanda’s unique competitive edges.

Construction of a project incorporating a spacious shopping mall, a deluxe hotel, residential buildings and auxiliary facilities normally takes four to five years, but Wanda can comfortably cut that timeline to just two years. Completing such a project one year ahead of the schedule means at least 200 million yuan in savings in financing and commissions, freeing up more capital for cash reserves, Wang said.

Mainland media reports say Wanda has almost 50 million sqm of floor space under construction, but Wang stresses that the scale is consistent with the 40 million to 50 million sqm of previous years.

Massive cultural and tourism complexes, or the next generation of signature developments that Wanda is plunging headlong into this year, are seen by some as potential black holes that could swallow up the entire company. But Wang insists that Wanda will be patient to spend much longer – perhaps four to five years – to build these large resorts, theme parks and shopping arcades. As a result, overall capital demand will be less pressing during the process.

Sales of adjacent retail space and homes, easy access to banks as well as zealous support from local cadres will also help ease the burden.

– Contact the writer at [email protected]



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