Over a six-hour dinner, Sun Hongbin, boss of China’s seventh largest property developer decided to splurge 15 billion yuan to bail out the debt-laden technology conglomerate LeEco.
Sun revealed at a press conference on Sunday that his company Sunac China Holdings (01918.HK) has been looking at venturing into non-property business since the past two years.
Sunac’s sales revenue surged 110 percent to 155.3 billion yuan last year, and has set a sales target of 210 billion yuan this year.
Now, the question arises: as the property business seems to be booming, why does Sunac want to move into other sectors?
Although Sun is fully confident about the prospects of his property operation, he says the company needs to secure new long-term revenue sources.
Also, one should prepare for the possibility that property sector growth could moderate in five or ten years.
Shifting from property development to rentals has been the traditional path for property developers to maintain profitability as high-growth period peters out, but that model may no longer work as e-commerce is posing a serious threat to physical stores, dampening demand for retail properties.
For example, commercial property giant Wanda Group, owned by Chinese billionaire Wang Jianlin, has reported that service sector was contributing up to 55 percent of the total revenue last year, demonstrating its success in transforming the business structure.
Sunac is thinking along the same line. Still, its pick of LeEco comes as a surprise.
LeEco started out as an online video site and has since branched out to numerous fields including mobile phone manufacturing and sports and autonomous car development in recent years. It is often mocked as a company good at talking up its shares with all kinds of new project ideas instead of delivering solid profits.
Sun, 53, has gone through several ups and downs in his business as a property developer. He would not be easily fooled by LeEco founder Jia Yueting, definitely not when we are talking about an investment as large as 15 billion yuan.
I’ve met with LeEco’s founder Jia several times. He is actually a bit shy, rather than the eloquent dreamer as most people perceive him to be.
But perhaps because he truly seems to believe in his ventures, he has a certain charisma that can often convince others to buy into his “crazy” ideas.
Coming back to Sunac, it has been one of the most sought-after stocks in southbound trading in recent months.
The company has a market cap of HK$28 billion with a price-to-book ratio below 1. Given the low current valuation and strong growth prospects, value investors in China have become huge fans of the firm.
The irony is that Sunac, considered as one of the best value stock picks, is investing big time in LeEco, a startup with no clear revenue model and still burning cash.
Meanwhile, it remains unclear how the deal can save LeEco.
Fifteen billion yuan is a lot of money, but it is still not sufficient to fill LeEco’s yawning financing gap.
Also, Sun has stressed that he will only invest in the non-auto business of LeEco. It means that Jia will needs to find other financing sources to fund his electric car dream.
This article appeared in the Hong Kong Economic Journal on Jan. 16
Translation by Julie Zhu
[Chinese version 中文版]
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