Caixin
May 27, 2013 03:26 PM

Dalian Wanda Group Dreams Big, Then Bigger

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(Beijing) -- Covering business in commercial properties, luxury hotels, tourism and entertainment, Dalian Wanda Group is among the fastest growing private companies in China.

The company has expanded rapidly both at home and abroad. Last year, Wanda paid US$ 2.6 billion to acquire the U.S. cinema chain AMC Entertainment Holdings Inc., giving it a foothold in North America's film industry. This year, the company is reportedly in talks with two European cinema chains for potential acquisition.

Wang Jianlin, Wanda's chairman, told Caixin that the company wants to control 20 percent of the market share in the United States, Europe and China.

Domestically, Wanda's expansion focuses on property and the retail sector. The company plans to build 20 commercial complexes and 20 department stores across the country every year, and is constructing its business on four pillars: commercial property, luxury hotels, tourism and retail chains.

Company information shows that, by the end of 2012, Wanda had total assets of 300 billion yuan, with net profit of about 10 billion yuan. The group operates 67 commercial complexes named Wanda Plaza, 38 luxury hotels, 6,000 cinema screens and 57 department stores.

By 2015, Wanda plans to increase its total assets to 400 billion yuan and have annual profit of 20 billion yuan.

Wanda's ambitious plans to build a business empire have amazed many, but some have questioned whether such radical expansion is sustainable.

Caixin learned that at the end of 2011, Wanda's liability ratio was 89.9 percent. A company source said although it is easy for Wanda to get bank loans, the company still needs to seek other financing sources to support its expansion.

The source said Wanda is hoping to seek public listings for each of its business segments.

Tapping Tourism

On April 28, work on Wanda's first tourist city in the country started in Harbin in the northern province of Heilongjiang, started. The project, which covers 80 hectares of land with facilities for culture, tourism, commercial retail and hotels, involves total investment of 20 billion yuan.

Wanda expects the Harbin Tourism City to open in 2017 and generate 6 billion yuan in annual income by receiving 20 million tourists per year.

Wanda plans to build up to eight tourism cities like the one in Harbin in the country, said Wang.

Company information shows that Wanda has plans for 10 tourism-related property projects, including a tourism city, and a resort and theme park. Total investments are set to reach 250 billion yuan.

Wanda operates a resort in the famous northern attraction of Changbai Mountain, in Jilin Province. The resort, which opened in July 2012 and includes hotels, villas, golf courses and Asia's largest ski area, is the company's first tourism project.

Wang said that in the winter season the resort received 100,000 tourists and the hotel occupancy rate reached 85 percent. He expected tourist traffic to further increase this year after the opening of six new air routes connecting Changbai Mountain and major cities.

Wang did not disclose the financial situation of the Changbai project, but said such large projects usually require eight to ten years to repay the investment.

The Changbai project has received attention also for the preferential policies that Wanda received from the government of Jilin Province. Wanda paid almost nothing for the 18 square kilometers of land it acquired for the project.

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With its massive investment plans and commitment to finish projects quickly, Wanda has long been a sweetheart of local governments eagerly searching for investors.

"Local governments always welcome us," a source at Wanda said. "They appreciate our commitment to finish a project within 18 months because officials hope to see an achievement within their tenure."

The source added that many local officials offer preferential policies for Wanda in land bidding. Wang said that with assistance from the local government, the complicated demolition and relocation works for the Harbin Tourism City finished in four months.

The close link between Wanda and local governments caught the attention of regulators. Last year, part of the Changbai project was investigated by the Ministry of Land and Resources over land purchase violations. Although the ministry later approved the project, it put the company under closer public scrutiny.

In addition, some analysts have expressed concern that Wanda ignored market demand when it expands so fast. For instance, the company has estimated that after the Harbin project opens, the value of per capita consumption by visitors will be 300 yuan per trip. However, in 2012, the figure for the city was 110 yuan.

Retail Ambitions

In mid-April, media reports said Wanda was in talks with high-end department store chain Yintai to buy its stake for HK$ 8.2 billion.

A source told Caixin that "the negotiations have gone on for a long time and haven't resulted in an agreement."

A zormer Yintai executive said the company's controlling shareholder, Shen Guojun, has sought to sell his 33 percent stake in the company, totaling 660 million shares.

Yintai operates 31 department stores across the country, half of them in the eastern province of Zhejiang. By the end of 2012, the company had total assets of 21.3 billion yuan. Yintai last year reported revenue of 3.9 billion yuan, with net profit of 970 million yuan.

Wanda operates 57 department stores, which generated a total of 11.2 billion yuan in 2012. Wanda plans to increase its number of stores to 76 by the end of this year. If the deal with Yintai is completed, Wanda will become the country's largest department store operator.

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The Wanda source said the company is attracted by Yintai's close relationship with high-end brands, such as Prada and Gucci. Wanda has struggled in negotiations to invite such luxury brands into its stores.

Since Wanda started its retail business in 2007, it has maintained double-digit growth of new stores every year, outpacing major rivals such as Parkson and New World Department Store.

However, most of Wanda's stores are still suffering losses. Wang said it usually takes three to four years for the new stores to become profitable, and he expected Wanda's entire retail business to be profitable in 2015.

However, some analysts said Wang's projections are too optimistic because he ignored growing competition from e-commerce companies.

Overseas Expansion

In early April, Wanda reportedly bought two major cinema chains in Europe, the Odeon & UCI Cinemas Holdings Ltd. and the Vue Entertainment Ltd.

Britain's Odeon & UCI is Europe's largest cinema chain and operates 236 cinemas in seven European countries, accounting for 10 percent of the market there. Analysts estimated that the valuation of Odeon & UCI is about US$ 1.6 billion.

VUE controls 120 cinemas in five European countries and Taiwan. The company's valuation is around US$ 1.2 billion, analysts say.

However, European cinemas have suffered a business decline since 2012, mainly due to the sluggish economy. A source close to the negotiations said Wanda was concerned that the business would continue to decline.

Wanda paid US$ 2.6 billion last year to buy U.S. cinema chain AMC Entertainment Holdings, which suffered a loss of US$ 242 million in 2011. After the transaction, AMC reported a US$ 58 million profit for 2012.

However, many domestic analysts are pessimistic about Wanda's overseas expansion in the film industry. Liu Gang, general manager of the north China region for Shenzhen Capital Group Co., said that compared to the United States and European markets, a better choice for Wanda's film business expansion is smaller Chinese cities.

"The film industry in the United States and Europe is declining," Liu said. "There is little room for growth. But in China, there is great potential."

But Wang remains ambitious about expanding outside China. If Wanda can control more than 20 percent in the world's three most important film markets – the United States, Europe and China – then it will have an empire with great voice in the industry, he said.

Meanwhile, Wang is also seeking to apply Wanda's investment model to a broader range of entertainment industries worldwide. "(Wanda) will mainly use merger and acquisitions, supported by direct investment," he said.

In December 2012, Wanda signed an agreement with India's Reliance Anil Dhirubhai Ambani Group to jointly develop commercial property and cinema chains in India and the United States.

The company recently acquired two properties in New York and London to develop luxury hotels.

A company source said that Wanda also plans to build a commercial complex in Mumbai, as well as in Turkey and Washington.

"Even those of us inside the company cannot predict Wanda's expansion," the source said. "It is limitless and diversified, and there is possibility in every direction."

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