A number of Chinese companies are scouring the world searching for assets to buy. Recently, ChemChina splurged USD 43 billion (payable in cash) on Syngenta, a Swiss agrochemicals company. Last year, the company bought Pirelli, an Italian tyre maker, for EUR 7.3 billion and took a stake in Mercuria, a commodity trader. ChemChina at least bought quality assets, albeit at (in our view, at least) a rather steep price. Other serial acquirers seem less picky and load up on questionable ventures across diverse industries.
Fosun, a company modeled after Warren Buffett’s Berkshire Hathaway, with investments ranging from insurance (à la Mr. Buffett although this business, now nearly 45% of total earnings, was only built in the last couple of years), property (a must-have for any Chinese company), pharmaceuticals (the original business when it started in 1992) and steel, bought a Greek fashion retailer, the 60-story One Chase Manhattan Plaza building in New York and Club Méditerranée, a tired French holiday camp formula. Angbang, an insurer, bought New York’s faded iconic hotel, The Waldorf Astoria, for a cool USD 1.95 billion (or nearly USD 1.4 million for each cramped room of this landmark hotel). In order to make the hotel inhabitable again, a “major renovation” is planned (probably the first since the opening of the hotel in 1893), whereas seller Hilton will ensure mediocre service for the next 100 years under a concession agreement reached with Angang. This Chinese insurer also bought Vivat (formerly known as Reaal), a flawed Dutch insurance company, for one euro but had to recapitalize the bankrupt insurer for EUR 1.35 billion and repay loans to SNS for EUR 550 million. Finally, Dalian Wanda, a property empire, diversified into cinemas and bought AMC, the second-largest cinema chain in the U.S. The company recently acquired Legendary Entertainment, an U.S. movie studio, for USD 3.5 billion. Wanda’s chief, Wang Jianlin, a movie buff, called it China’s biggest cultural investment: Legendary developed the “Godzilla” franchise.
What all these companies have in common is that they apply a lot of debt to fund the acquisitions. It is not easy to get a clear picture of how much debt is on the balance sheet given poor governance standards and often complex organizational structures. For example, S&P withdrew ratings for Vivat on lack of information. According to S&P, ChemChina is 11.9 times levered (measured as total debt/EBITDA) and this is before the assumption of the Syngenta deal. Fosun is 17.3 times levered (on a net basis), although earnings might be flattered depending on how insurance liabilities are accounted for. Zoomlion, a company that manufactures construction machinery like cranes, has a net leverage of 43 times (again, according to S&P) but still wants to bag U.S. based Terex for USD 3.3 billion. Still bonds of these companies are trading at yield levels that are more or less at par with U.S. B-rated credits (average yield of 10.2%). Zoomlion’s 2022 bonds trade at 10.4%. Fosun’s 2020 bonds trade way below that at a yield of 7.1%.
How long can this debt-fueled growth story last until investors realize that something is amiss. Or do they reckon that the Chinese state will bail them out? Fosun’s boss, Guo Guanchang, better known as “China’s Warren Buffett” may soon discover one of the many wisdoms of the Sage of Omaha: “only when the tide goes out you discover who has been swimming naked”.
