China’s groups ditch car parts for Hollywood
Quick sidestep dance from old China to China Light
Banks grow tepid as manufacturers push into entertainment, pharma and gaming
FEBRUARY 12, 2017 by: Don Weinland in Hong Kong Song Liao
Song Liao Automotive had tried its luck in different industries since the mid-1990s, moving from passenger cars to spare auto parts, infant formula, medical instruments and food packaging.
But after a string of losses, the group in 2016 recreated itself yet again — this time with designs on breaking into the global entertainment business through a billion-dollar overseas acquisition.
Song Liao, which changed its name to Cultural Investment Holdings (CIH) in April, is one of scores of Chinese companies that are trying to leave behind slow growth manufacturing and leap into new sectors fashionable at home and abroad — including entertainment, pharmaceuticals and travel.
Researchers tracking these companies say many listed Chinese groups have sought to make such a transformation, often with the help of an expensive overseas takeover designed to bolster their credentials in otherwise unfamiliar lines of business.
Many of those deals were done in 2016, helping drive the record $220bn in overseas M&A Chinese companies agreed to last year, double the 2015 total.
But now they face two looming obstacles. First, regulators seeking to stem the outflow of capital from China have for the past few months been sharply restricting acquisitions abroad. Second, bankers have begun to worry about the commercial viability of investments in modern sectors by old-fashioned industrial groups. They are also wary of the impact of the new official curbs on capital outflows.
“Whatever is hot, they go acquire assets in that area and then ask for a name change,” says Li Wei, a professor of economics at Cheung Kong Graduate School of Business, noting that the decisions can be made hastily.
Professor Li has identified more than 100 similar groups, the majority of which change their names, adding words such as “technology”, “internet” or “pharmaceutical” to their new titles. Chinese poultry group Sumpo Food changed its name to Leyou Technologies before buying UK game developer Splash Damage last year, for example.
Driving the corporate upheavals has been local government and bank support, Prof Li says.
Many of the groups have been large employers and generators of tax revenue for medium and small cities around the country. As manufacturing and other industry slows in China, company leaders and local government cadres have become eager for the groups to find a new means of survival.
Buying into higher-returning assets has been one solution, and local banks are often on hand to provide the capital needed to make the transition, Prof Li says.
Just months after changing its name and announcing a foray into film and television, CIH agreed to pay out $187m in November for a 75 per cent stake in Framestore, the British visual-effects company that worked on blockbuster Hollywood films such as The Dark Knight and The Martian. The deal was backed by local banks.
Chemical group Jinke Peroxides, which changed its name to Jinke Entertainment Culture last year, announced in January that it would pay $1bn for UK-based Outfit 7, the developer of “Talking Tom”, a computer application for children.
Jinke — both as a peroxide maker and as vendor for children’s video games — has enjoyed strong local-government support for the deal.
But some investment banks have become increasingly tepid on supporting the companies’ global ambitions following a recent regulatory clampdown.
China’s foreign exchange regulators have vowed to stem capital outflow in the form of overseas investment. In December, the Ministry of Commerce warned it would monitor closely all outbound investments into gaming, entertainment and film production for speculative investments.
Around the same time CIH announced the buyout of Framestore, the company approached at least two investment banks about much larger acquisition targets, including Imagina Group, a Spain-based media company that has backed films such as Woody Allen’s Vicky Cristina Barcelona and distributes Spain’s top football league internationally.
Bankers who had contact with CIH were puzzled at its rapid swing from auto parts to film production and media rights. The banks decided against working with the company on the deal that valued Imagina at more than $2bn.
“We have no idea how the regulator would treat [this kind of deal],” says one of the bankers.
CIH did not respond to a request for comment on the matter.
Jingfeng Pharmaceutical’s plan to buy a New York-listed hospital operator has run into similar problems, with bankers questioning the company’s ability to make a big transition.
Previously, Jingfeng was a producer of agricultural and industrial pumps called Hunan Tianyi Science & Technology. In 2015, after a period of restructuring, it emerged as Jingfeng and announced that its primary line of business was medicine investment and biopharmaceutical research.
During the final months of 2016, the company approached Chinese investment banks to explore a takeover offer for Nobilis Health Corp, according to two people familiar with the matter. Nobilis manages and owns healthcare facilities in Texas and Arizona and has a market capitalisation of $163m.
Banks reacted coolly to Jingfeng’s proposal and do not plan to move ahead with the client — mainly because the company’s lack of experience in the area.
Jingfeng did not respond to requests for comment.
“It’s difficult for management to go into these new industries,” says Ivan Chung, a managing director at Moody’s Investors Service. “Overseas investment is particularly tough because they may not understand things like tax and law in other countries.”
Rapid corporate transitions can sometimes signal distress. Mr Chung points to the bond default of Cloud Live Technology in 2015 just months after the company made a radical shift into cloud computing. Originally it operated Hunan-style restaurants in Beijing.
Prof Li says many of the corporate transformations have been shortsighted, with the push into a new industry coming too late, misreading market or policy signals, or simply failing at the business.
“Five years from now, based on what we know about economics, many of these companies will not succeed,” he says. |
