Interviewed this morning on CNBC’s Squawk Box about Wanda and its new “asset light strategy”.
My conclusion: “Wanda just underwent the corporate version of emergency bariatric surgery. It’s suddenly become a much slimmed-down company. What Wanda is today, what it will become, we don’t yet know. But, it looking clear Wanda is no longer one of the heavyweights of China’s private sector. “
BEIJING â€” The Chinese property developer Sunac China Holdings has turned into one of the countryâ€™s biggest white knights, swooping in to help troubled companies with too much debt. The risk: Sunac is amassing its own large pile of debt in the process.
Sunac has more than doubled its debt load in a year to $38 billion. Its deal this week to buy a portfolio of theme parks and hotels from the Dalian Wanda Group, the heavily indebted Chinese conglomerate, will add to the tab. At $9.3 billion, the acquisition is larger than the market value of Sunac.
â€œThe problem for Sunac is twofold,â€ said Peter Fuhrman, chairman of China First Capital, an investment bank. â€œThey themselves are already rather overleveraged and they are not paying distressed prices.â€
Sunac is offering a much-needed lifeline.
For years, China fueled growth by providing easy credit. Chinese companies borrowed heavily, using the money to fund aggressive expansions.
As the economy now slows, companies are increasingly running into financial trouble, with some having to borrow even more to pay their debts. Policy makers are worried that the countryâ€™s Passover level of corporate debt could threaten the broader financial system.
Sunac, Chinaâ€™s seventh-largest property developer in terms of sales, has been able to tap into its financial strength to help companies under pressure. Since 2012, Sunacâ€™s property sales have grown at double-digit rates nearly every year, giving it the firepower to scoop up assets and land plots.
Before the Wanda deal, Sunac in January pumped $2.2 billion into LeEco, a tech firm struggling to pay off its creditors. This May, it paid $1.5 billion for an 80 percent stake in Tianjin Xingyao, a property firm known for leaving its projects uncompleted.
In 2015, Sunac made a play to rescue Kaisa, pledging $1.2 billion to take over the troubled property company; it later pulled out after Kaisa did not meet certain conditions for the deal. That same year, it announced a partnership with the cash-poor Yurun Holding Group, which ran a business empire ranging from sausage making to property and finance.
It is a remarkable turnabout for the companyâ€™s founder, Sun Hongbin.
Mr. Sun started his career at the Lenovo Group, where he was promoted to run enterprise development. But he had a falling out with Liu Chuanzhi, the founder of Lenovo, over a business dispute. Related to the dispute, Mr. Sun was sentenced in 1992 to five years in jail for misappropriation of public funds.
After his release in 1994, he met with the founder of Lenovo and apologized, according to the website of The Peopleâ€™s Daily, the ruling Communist Partyâ€™s official newspaper. The Lenovo founder eventually lent Mr. Sun about $74,000, which he used to start a predecessor real estate firm to Sunac.
Lenovo did not immediately respond to a request for comment.
When Mr. Sun started Sunac in 2003, he focused on the cities of Wuxi and Chongqing and then moved on to Chinaâ€™s most developed cities, among them Beijing, Shanghai, Tianjin and Hangzhou, building apartments with names like Beijing Fontainebleau Chateau. Sunac built its residential projects in good locations near city centers and was aggressive in acquiring land plots â€” with higher debt.
â€œPeople who have failed are those who have been defeated by themselves,â€ Mr. Sun told a newspaper, China Business News, in 2013. â€œBut I often tell others: After you fail, you can start again.â€
With the Wanda deal, Sunac is extending its reach into tourism, paying $9.3 billion for 76 hotels and a major chunk of its 13 tourism projects, in the countryâ€™s largest property acquisition ever. The purchase will help Sunac diversify its business, which is hurting from government restrictions on home sales as Beijing seeks to cool a frothy property market. It also strengthens the companyâ€™s hand in an industry dominated by bigwigs like the China Vanke Group and Country Garden.
â€œWithin the housing industry, the powerhouses are really strong,â€ said Lu Wenxi, an analyst for Centaline Properties who is based in Shanghai. â€œIf you donâ€™t gobble up the fat ones, it is easy to be eaten up by others. Taking on more projects will prevent you from being eaten.â€
Investors have rewarded Sunac for the deal. Shares of Sunac rose 14 percent in Hong Kong on Tuesday after they resumed trading after the deal announcement.
But the deal will add to an already significant debt load. In 2016, the companyâ€™s net gearing ratio â€” a measure of total debt to shareholdersâ€™ equity â€” rose to 121.5 percent, from to 75.9 percent in 2015. Fitch Ratings recently downgraded the companyâ€™s credit rating to BB-, saying Sunacâ€™s acquisitive approach had made its financial profile â€œmore volatile.â€
Wanda is helping finance the acquisition. Sunac, in a statement to the Hong Kong Stock Exchange on Monday, said Wanda would procure a loan for the company worth about $4.4 billion.
Seller financing is not uncommon, both in China and the West. But Wandaâ€™s role means that Sunac doesnâ€™t have all the money upfront.
â€œIn my experience, Iâ€™ve never seen it anywhere,â€ said Lester Ross, a Beijing-based partner with the law firm WilmerHale, who has advised deals in China for the last 20 years. â€œNo client that I represent would accept a deal like that where youâ€™re responsible for raising the money to pay for somebody else.â€
Sunac did not return multiple calls for comment. The company said in a statement to the Hong Kong Stock Exchange on Tuesday that the deal with Wanda â€œwill add a large number of prime land reserves and property assets for the company at a reasonable cost.â€
The LeEco deal is also prompting concern.
Sunac invested $2.2 billion in LeEco, buying minority stakes in three of the conglomerateâ€™s more stable businesses, including the smart TV affiliate Leshi Zhixin, Le Vision Pictures, and Leshi Internet. The two companies donâ€™t have many overlapping interests, and LeEcoâ€™s finances have continued to sour. Before the Wanda deal, shares of Sunac were falling on fears that LeEcoâ€™s problems would spread.
In a January news conference, Mr. Sun said many people had tried to dissuade him from investing in LeEco, adding that several were â€œresolutely opposedâ€ to it.
â€œI seriously considered their views, but I donâ€™t think their opinions are sufficient to change my mind,â€ he said.