HONG KONG: GOME Electrical Appliances Holding Ltd , China's No.2 appliances distributor, is trying to buy almost 500 stores owned by its jailed founder as it looks beyond a long-running management tussel to capitalise on China's urbanisation drive, Reuters reported on Thursday, Sept 1.
Huang Guangyu, the founder and largest shareholder of GOME, is serving a 14-year sentence for bribery and insider trading.
In addition to owning a one-third stake in GOME, Huang still owns a large number of GOME-branded stores that have not yet been included in the listed GOME, in which U.S. private equity firm Bain Capital also owns a 9.9 percent stake.
Investors have hoped Huang, once named as China's richest man, would sell his own stores into the listed vehicle following his winning of a protracted boardroom fight with GOME's then chairman Chen Xiao.
Huang had previously threatened to take back 493 privately owned stores from GOME when a three-year management agreement expires in December 2012.
"The founder reamains very ambitious. Although he is in adverse situation at the moment, he is still constantly thinking about the development of the company," GOME's new chairman Zhang Dazhong said in an interview with Reuters.
Acting Chief Financial Officer Victor Fang said in the interview that GOME had filed an application with Chinese regulators to buy Huang's expanding network of stores.
"The company has been pushing for the injection. We hope it can be done as soon as possible but we don't know how long it will take to get regulatory approval," Fang said. He gave no details.
An injection of the stores into the listed firm would likely put GOME in a stronger position to tap the rising demand for appliances in China.
"The injection plan is postive for the company's expansion. In the long term, it would reduce the confusion and potential conflict of interest between the listed and non-listed stores," Andrew To, head of research of Emperor Capital Group.
ADDING STORES
Zhang, an avid tennis player who replaced Chen Xiao earlier this year, said GOME also aimed to add about 260 retail outlets per year as it seeks to ride the country's housing boom.
That would take its store total to 1,600 by 2014, excluding the stores to be bought from Huang, and 59 stores from Beijing Dazhong Electrical Appliances Co Ltd -- of which Zhang was the founder.
Zhang, 62, is a veteran in China's fast-growing home appliance industry who sold his interests in Beijing Dazhong in 2007 for 3.6 billion yuan to GOME.
GOME would focus on the domestic market and currently had no plan to expand overseas, Zhang said.
GOME, which posted a 30.1 percent jump in net profit for the first half of 2011, has said it will focus expansion on second-tier Chinese cities as the country's drive to build more affordable housing over the next five years spurs demand.
"It (China's affordable housing scheme) will lend tremendous support to the businesss of appliance distributors. This is a big pie for us," Zhang said.
But some analysts say China's crackdown on property speculation, now centred on major cities, will limit appliance demand growth. There have been media reports that China is likely to spread its home purchase restriction to more cities.
A GOME store near Beijing's Tiananmen Square was nearly empty on Wednesday, with five costumers wandering the brightly lit ground floor looking at the electronics and domestic brand washing machines and air conditioners. The unairconditioned second floor drew no customers.
A voice over the store's public address system promoted the stores' repair and return policies.
"GOME is a very big company with stores all over the country. I think the quality is more trustworthy and when the camera breaks I know I can come back here and they will fix it for me," a man in his thirties, surnamed Li, told Reuters as he came to Gome to buy a new camera.
BAIN CAPITAL HAS NO PLAN TO EXIT
GOME, with a market capitalisation of about $7.5 billion, competes with Suning Appliance , China's largest appliance chain, and foreign players such as Best Buy .
GOME faces wider challenges that retailers are grappling with in China's market, including rising labour and operating costs as well as cut-throat competition.
Fang said GOME's rental costs as a percentage of its overall sales stores have been increasing, due in part to opening of new stores, but the firm will try hard to boost its operating margins.
The company's net profit margin was 4.20 percent in the first half, up 0.33 percentage points from a year earlier.
During the interview on Thursday, both Zhang and Bain Capital denied rumours that the U.S. private equity company was planning to sell down its GOME stake.
"We have not engaged any investment bank with regards to potential sale of GOME stock," said Jonathan Zhu, managing director of Bain Capital and a non-executive director of GOME.
"Bain is pleased with GOME's performance and intends to remain a significant shareholder in the foreseeable future," he said, adding that Bain typically holds stakes in a company for at least five years."
Bain was brought in by Chen Xiao in June 2009 to invest about $420 million in then cash-strapped GOME via convertible bonds.
Chen was formerly the head of China Paradise Electronics Retail Ltd, which was bought by Gome for about $680 million in 2006, creating a retail giant then with about $8 billion in sales and a 10 percent shares of the Chinese market.
Shares of GOME ended up 0.3 percent on Thursday at HK$3.35, after hitting a day high of HK$3.59. - Reuters
Huang Guangyu, the founder and largest shareholder of GOME, is serving a 14-year sentence for bribery and insider trading.
In addition to owning a one-third stake in GOME, Huang still owns a large number of GOME-branded stores that have not yet been included in the listed GOME, in which U.S. private equity firm Bain Capital also owns a 9.9 percent stake.
Investors have hoped Huang, once named as China's richest man, would sell his own stores into the listed vehicle following his winning of a protracted boardroom fight with GOME's then chairman Chen Xiao.
Huang had previously threatened to take back 493 privately owned stores from GOME when a three-year management agreement expires in December 2012.
"The founder reamains very ambitious. Although he is in adverse situation at the moment, he is still constantly thinking about the development of the company," GOME's new chairman Zhang Dazhong said in an interview with Reuters.
Acting Chief Financial Officer Victor Fang said in the interview that GOME had filed an application with Chinese regulators to buy Huang's expanding network of stores.
"The company has been pushing for the injection. We hope it can be done as soon as possible but we don't know how long it will take to get regulatory approval," Fang said. He gave no details.
An injection of the stores into the listed firm would likely put GOME in a stronger position to tap the rising demand for appliances in China.
"The injection plan is postive for the company's expansion. In the long term, it would reduce the confusion and potential conflict of interest between the listed and non-listed stores," Andrew To, head of research of Emperor Capital Group.
ADDING STORES
Zhang, an avid tennis player who replaced Chen Xiao earlier this year, said GOME also aimed to add about 260 retail outlets per year as it seeks to ride the country's housing boom.
That would take its store total to 1,600 by 2014, excluding the stores to be bought from Huang, and 59 stores from Beijing Dazhong Electrical Appliances Co Ltd -- of which Zhang was the founder.
Zhang, 62, is a veteran in China's fast-growing home appliance industry who sold his interests in Beijing Dazhong in 2007 for 3.6 billion yuan to GOME.
GOME would focus on the domestic market and currently had no plan to expand overseas, Zhang said.
GOME, which posted a 30.1 percent jump in net profit for the first half of 2011, has said it will focus expansion on second-tier Chinese cities as the country's drive to build more affordable housing over the next five years spurs demand.
"It (China's affordable housing scheme) will lend tremendous support to the businesss of appliance distributors. This is a big pie for us," Zhang said.
But some analysts say China's crackdown on property speculation, now centred on major cities, will limit appliance demand growth. There have been media reports that China is likely to spread its home purchase restriction to more cities.
A GOME store near Beijing's Tiananmen Square was nearly empty on Wednesday, with five costumers wandering the brightly lit ground floor looking at the electronics and domestic brand washing machines and air conditioners. The unairconditioned second floor drew no customers.
A voice over the store's public address system promoted the stores' repair and return policies.
"GOME is a very big company with stores all over the country. I think the quality is more trustworthy and when the camera breaks I know I can come back here and they will fix it for me," a man in his thirties, surnamed Li, told Reuters as he came to Gome to buy a new camera.
BAIN CAPITAL HAS NO PLAN TO EXIT
GOME, with a market capitalisation of about $7.5 billion, competes with Suning Appliance , China's largest appliance chain, and foreign players such as Best Buy .
GOME faces wider challenges that retailers are grappling with in China's market, including rising labour and operating costs as well as cut-throat competition.
Fang said GOME's rental costs as a percentage of its overall sales stores have been increasing, due in part to opening of new stores, but the firm will try hard to boost its operating margins.
The company's net profit margin was 4.20 percent in the first half, up 0.33 percentage points from a year earlier.
During the interview on Thursday, both Zhang and Bain Capital denied rumours that the U.S. private equity company was planning to sell down its GOME stake.
"We have not engaged any investment bank with regards to potential sale of GOME stock," said Jonathan Zhu, managing director of Bain Capital and a non-executive director of GOME.
"Bain is pleased with GOME's performance and intends to remain a significant shareholder in the foreseeable future," he said, adding that Bain typically holds stakes in a company for at least five years."
Bain was brought in by Chen Xiao in June 2009 to invest about $420 million in then cash-strapped GOME via convertible bonds.
Chen was formerly the head of China Paradise Electronics Retail Ltd, which was bought by Gome for about $680 million in 2006, creating a retail giant then with about $8 billion in sales and a 10 percent shares of the Chinese market.
Shares of GOME ended up 0.3 percent on Thursday at HK$3.35, after hitting a day high of HK$3.59. - Reuters
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