China property tycoons' new ventures keep investors wary

March 29, 2019 10:38
Evergrande's Xu Jiayin has outlined big ambitions for the electric car business, but investors aren't too convinced about the merits of the large-scale diversification. Photo: Bloomberg

Chinese property giant Evergrande (03333.HK) announced stellar 2018 figures this week. Sales jumped 49.9 percent from a year earlier to 466.2 billion yuan and net profit soared 53.4 percent to 37.4 billion yuan.

Despite making more money than any other Chinese developer last year, Evergrande's share price dropped 5 percent in two days after the results announcement. That’s because Chairman Xu Jiayin revealed at a press conference that the company intends to march full-speed into electric cars, and vowed to become the world's largest electric carmaker within three to five years.

Last June, a unit of Evergrande Group injected US$2 billion into struggling electric car manufacturer Faraday Future, which was founded by LeTV chairman Jia Yueting. But the two went separate ways since then due to a spat.

The setback did not stop Xu from pursuing his electric car dream. He went on to splurge nearly 30 billion yuan in acquiring five companies related to car-making, including NEVS AB and Cenat New Energy.

Minority shareholders are worried that Evergrande might pour most of its profits into electric vehicle business in coming years.

Why is Xu so confident about building an electric vehicle empire? He explained that Evergrande has already positioned itself in a number of strategic segments in the business, including batteries, R&D, manufacturing and distribution.

He also reminded investors of his previous decade-long experience in manufacturing, so “don't underestimate” his knowledge even though he is venturing into a new field.

Xu was referring to his stint in Henan Wuyang Iron & Steel Company three decades ago.

But the comments were not reassuring enough for investors, as it remains doubtful whether his experience in the old days can be transferred to the high-tech electric vehicles sector.

In fact, Evergrande tried diversification before, and has spent 100 billion yuan to explore grain and edible oil business in 2014. It also ventured into insurance, healthcare, internet and other popular industries. But little progress has been achieved so far.

Peer Sunac China Holdings (01918.HK) has lost nearly HK$20 billion from its investment in LeTV. The complete flop adds to investors’ concern about Evergrande’s big push into e-cars.

Interestingly, diversification appears to be an industry-wide trend. Since the government has made its stance against property speculation clear, making huge profits by taking advantage of a red-hot property market has become politically incorrect. This partly explains why developers are seeking new avenues.

Evergrande has chosen a completely unrelated sector while some of its rivals have set sight on more related business.

Country Garden has hired over 1,000 employees with doctoral degrees for a new robotics unit. China's second largest developer in terms of net profit intends to apply robotics to over 300 construction sites across the nation. That would help reduce costs and boost efficiency considerably.

As for Sunac, after the Le TV fiasco that cost the developer two years of profit, it spent 43.8 billion yuan to acquire 13 cultural and tourism projects from Dalian Wanda in 2017. It plans to commit over 100 billion yuan in cultural and tourism sectors in the future.

As big developers try to reinvent themselves, investors may continue to view their new projects with suspicion before the ventures can prove themselves.

This article appeared in the Hong Kong Economic Journal on March 28

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist