Can US$1.4 Billion Rescue the Debt-Ridden Suning?
Mismanagement, reckless expansion, and failed investments left retail giant Suning with no choice but to surrender its controlling shares.
On 5 July 2021, Chinese electronics retailer Suning Tesco issued a notice to disclose the latest plan of its share transfer. The Jiangsu State-owned Assets Supervision and Administration Commission (JSASAC) and Industrial Capital Investment led an RMB8.83 billion (US$1.4 billion) investment for a 17.0% share in Suning to support the company’s efforts to address liquidity problems. The company would no longer have a controlling shareholder or actual controller after the share transfer. On 12 July, Suning announced that its billionaire founder Zhang Jindong would resign as a chairman and become the honorary chairman.
Suning’s business segments
Established in 1990, Suning employs around 280,000 people in China. The company has product offerings across eight major industries: Suning Tesco, Suning Real Estate, Suning Finance, Suning Culture, Suning Sports, Suning Logistics, Suning Technology and Suning Investment.
How did Suning end up in this situation?
1. Suning’s retail business
In the early years, Suning and GOME fought fiercely in the retail electronics sector. After the arrest of Huang Guangyu, GOME’s chairman in 2008, Suning ascended to the top of the list. In 2009, “Suning Tesco” was launched. In the beginning phase, Suning mainly focused on its offline business.
On 14 August 2012, Jingdong, China’s online retail giant, launched a price war against offline retailers like Suning and GOME. Jingdong guaranteed that all of their household appliances were at least 10% cheaper than GOME and Suning chain stores. At that time, household appliances accounted for nearly 50% of Suning’s sales due to their offline products’ large gross profit margin. In response to the price war, Suning matched their product prices both online and offline. This move reduced Suning’s gross profit by 2.5%.
Other than the price war, Suning’s offline expansion also led to growing losses. In 2019, Suning had more than 5,000 stores. This accounted for a loss of RMB2.2 billion (US$0.3 billion) in the first half of the year.
The situation was worsened by Suning’s decision to acquire department stores. In June 2019, Suning purchased 80% of the equity of Carrefour China for RMB4.8 billion (US$0.8 billion). In September, Suning bought Wanda Department Store for RMB2.7 billion (US$0.4 billion). These two companies had already been losing money for years. As Suning failed to turn the department stores into profit-making ventures, losses continued.
According to Suning’s financial report, its net profit plunged 86.11% year on year in 2013. In 2014, its net profit excluding non-recurring profits and losses was negative RMB1.3 billion (US$0.2 billion). The figure never became positive after 2014.
2. Suning’s cross-field diversified development
After being dissatisfied with the performance of its main retail business, Suning attempted to expand into other industries to boost its competitiveness.
In 2013, Suning acquired the PPTV video platform with US$250 million.
In 2014, Suning bought Manzuo.com for US$10 million.
In 2015, Suning invested RMB1.93 billion (US$0.3 billion) in Nubia, a smartphone company.
In 2016, Suning spent EUR270 million (US$318 million) to acquire a 68.5% stake in Inter Milan, a football club. Afterwards, it bought Longzhu Live for US$322 million. In the same year, Suning paid US$721 million for the Premier League’s broadcasting rights.
In 2017, Suning invested RMB3 billion (US$0.5 billion) in Tiantian Express.
However, rather than increasing profits, those investments increased losses. PPTV lost almost RMB1 billion (US$0.2 billion) in less than two years; Manzuo.com shuttered a year after an equity transfer; Nubia lost RMB200 million (US$31.3 million) in 2016 and is now practically gone. Longzhu Live also lost RMB500 million (US$78.1 million) that year. From 2017 to the first half of 2020, the cumulative loss of Tiantian Express exceeded RMB4 billion (US$0.6 billion).
In sports, things became even worse. Suning spent EUR625 million (US$736 million) on operations over the next four years, in addition to the high cost of buying Inter Milan. The company paid extra pay to bring in top players such as Brazilian great Alex Teixeira — costing Suning EUR50 million (US$58.9 million). Based on the league’s average operational expenditures, Suning spent at least RMB500 million (US$78.1 million) every year on its football team.
Yet, Suning’s significant spending brought few returns. Suning Sports’ deal with the Premier League could only be terminated in September 2020. The company also owes the Bundesliga, Serie A, and Ligue 1 tens of millions of dollars in copyright payments and will face numerous lawsuits soon. The Suning football team has ceased operations and is in the process of finding a new owner. Inter Milan is also on the market, with a sale price of EUR1 billion (US$ 1.2 billion).
Finance is one of the few profitable industries among Suning’s diverse sectors. Suning Finance has three major divisions: Bank of Suning, Suning Financial Services, and Suning Consumer Finance. According to Suning’s official figures, the bank’s total assets in 2020 were RMB72.4 billion (US$11.3 billion), with a net profit of RMB420 million (US$65.6 million).
In 2020, the operating revenue of Suning Finance Service was RMB6.9 billion (US$1.1 billion), and its net profit was RMB1.6 billion (US$0.2 billion). However, as financial regulation has become more stringent in recent years, the valuations of large fintech companies have plummeted. Although Suning’s financial service business can support its retail business and contribute part of the profit, it is still difficult to sustain its overall earnings and obtain a high valuation.
In November 2017, Suning made a strategic investment of RMB20 billion (US3.1 billion) in Evergrande Real Estate. On the one hand, it wanted Evergrande to provide landing scenes for its multi-level retail malls. On the other hand, if Evergrande Real Estate successfully obtains an in A-share backdoor listing, this investment will serve as a significant opportunity for promotion. However, in November 2020, Evergrande’s four-year plan to go public failed.
At that time, Suning was heavily in debt. This RMB20 billion (US3.1 billion) investment in Evergrande was Suning’s last chance to turn the tables.
What did Suning do to cover the deficit?
Suning attempted to cover up the situation by beautifying the company’s financial statements through asset sales, sale and leaseback, as well as third-party transactions. The retail company sold its Alibaba shares twice in 2017 and 2018, netting RMB4.2 billion (US$0.7 billion) and RMB11.8 billion (US$1.8 billion) correspondingly. In 2016 and 2019, Suning Tesco “gained profits” by selling PPTV, Suning Stores, and Suning Financial Services to affiliated parties. For instance, Suning Cultural Investment Management Co., managed by Suning Holding Group, received PPTV’s stake.
Suning also made use of sale and leaseback transactions to continue operations. Suning Tesco has sold and leased back real estate investment trusts (REITs) for offline stores, logistics warehouses, and other physical assets numerous times since 2014. In 2014 and 2015, Suning sold the rights and interests of its 11 stores and 14 stores for RMB2.4 billion (US$0.4 billion) and RMB1.4 billion (US$0.2 billion) respectively and then leased them back at market pricing to keep the business running. In 2018, the company surrendered all of its equity shares in five logistics real estate firms to the assignee in 2018 and signed ten-year leases to secure long-term use rights to these logistics warehouses.
Suning’s offline store business model has also been significantly adjusted, with a greater proportion of franchised stores. Since 2017, the number of franchised stores has been rapidly increasing, in contrast to directly operated stores.
Suning’s crisis exposed
On 10 December 2020, Suning revealed its massive debt problem during its share pledge announcement. At that time, Zhang Jindong and his son pledged 100,000 shares of Suning Holdings to Taobao for total share capital of RMB1 billion (US$0.2 billion).
On 25 February 2021, Zhang Jindong announced that he would transfer the controlling stake of Suning Tesco, Suning Group’s core and most crucial asset. This news further revealed the company’s predicament. The Shenzhen State-owned Assets Supervision and Administration Commission (SASAC) was expected to hand over 23% of Suning’s shares for RMB14.817 billion (US$2.3 billion). However, the deal never happened.
The equity transfer was finally settled in July when JSASA invested RMB8.83 billion (US$1.4 billion) in joint with Industrial Capital Investment. This transfer led to the questioning of Suning’s future ownership by its founder Zhang Jindong as Suning Tesco officially becomes a non-controlling shareholder.
What is the future of Suning?
After the equity transfer, Zhang Jindong now holds 17.62% of Suning, 2.73% of Suning Holding, 1.39% of Suning Appliance, and 16.96% of Xinxin Retail Fund Phase II.
Yet, Suning’s future remains unclear. Many doubt that the selling of shares will allow Suning to weather the storm. Although the capital gained temporarily alleviates the situation, Suning still must rely on its earning power to go further in the future.
According to the company’s earnings preview released late on 5 July, Suning is expected to lose RMB2.5 billion (US$0.4 billion) to RMB3.2 billion (US$0.5 billion) in the first two quarters.
The new shareholding structure will naturally alter the company’s organisational structure and industrial deployment. Hope remains for Suning to find new strengths and bring back its former glory.
