League of Legends
HONG KONG, 30 September 2016 -- (ACN Newswire) -- Liu Chuanzhi is best known as the founder of Lenovo. But he now wants to draw attention to three funds that have quietly become his company's biggest source of profits.
According to Finance Asia's September Issue, on July 9, hundreds of Chinese investors and start-up entrepreneurs flocked to an annual conference held by Legend Holdings. They braved the oppressive heat of the Beijing summer not simply because they wanted to network or listen to the various speakers imparting nuggets of wisdom. They also came to pay their respects to the most important man in the room: Liu Chuanzhi, the 72-year-old chairman of the Chinese investment conglomerate.
Liu is widely regarded as an icon of entrepreneurial capitalism in modern China and the "godfather" of its information technology industry. He is best known as the founder of Lenovo, now the world's biggest maker of personal computers.
That alone would have made those attending the conference pay attention to Liu's every word. Lenovo, one of China's few global brands, has long been a major force outside of its home market. The company stunned analysts in late 2004 when it paid $1.25 billion for IBM's PC unit, taking on another $500 million of debt.
But Liu's standing in China's business community does not just rest on his history with Lenovo. His reputation is still growing, amid Legend Holdings' eye-catching diversification strategy.
Legend has, in recent years, been expanding beyond its struggling PC business. By teaming up with its three part-owned investment funds - Hony Capital, Legend Capital and Legend Star - the group has already dipped its toes into a number of different sectors, from food production to car rentals, from dentistry to start-up incubation.
This strategy has already paid dividends. Lenovo is still far and away the biggest part of Legend's business in revenue terms, but the majority of the company's profits now come from elsewhere.
Legend's profit breakdown shows how important the strategy has been for the company. But it has also raised questions about how exactly investors should value a firm that now combines an aging PC business with a series of vibrant - but much smaller - investment funds.
PAY IT FORWARD
Liu founded both Legend and Lenovo in 1984, long before a swathe of home-grown and foreign investors were competing to finance Chinese start-up companies. He relied instead on investment from the Chinese Academy of Sciences, a state-backed scientific think tank.
That early experience showed Liu the importance of early stage support for Chinese companies - something that has formed the bedrock of his diversification strategy at Legend.
"The strength of a nation's economy relies on its companies' innovation capability and its young generation's entrepreneurship," he told the roughly 800 delegates attending the 'Will Conference', an annual gathering hosted by its angel investment fund Legend Star. "Therefore, innovation and entrepreneurship isn't just a slogan to us, but the only high road to strengthen the country and enrich the people."
He has put his money where his mouth is. Legend set up the venture capital fund Legend Capital in 2001, private equity player Hony Capital in 2003, and angel investor Legend Star in 2008. Legend Holdings owned partial stakes in Legend Capital and Hony Capital 100% of Legend Star when it issued an IPO prospectus last year.
The group itself also makes direct investments in private and listed firms to gain a controlling stake. Legend's investment portfolio includes Hong Kong-listed car rental service provider China Auto Rental, also backed by US private equity firm Warburg Pincus; Bybo Dental Group, one of China's biggest chains of private dentists; and Joyvio Group, its modern agricultural division.
This approach - mixing strategic investment by Legend and financial support from its angel investment, venture capital and private equity arms - is designed to make sure that Legend is involved in financing throughout the life-cycle of promising companies.
Perhaps fittingly for a Chinese executive who was going overseas long before many of his peers looked offshore for acquisitions, the strategy was inspired by a visit to a foreign corporation.
In 1998, Liu visited General Electric's Colorado facility on a two-week fact-finding mission. He told Chinese state broadcaster China Central Television last September that the trip inspired him to build a top-notch conglomerate. The US company had, Liu said, developed a unique model that brought together seemingly unconnected subsidiaries, such as finance, engineering and biotechnology.
The idea is not simply to spread Legend's capital far and wide in order to hit the most targets. According to Ji Chaofeng, managing director of Legend's asset management department, the approach can instead stimulate synergies across platforms - and potentially generate higher returns for the group.
"It's like we are in a gang fight," Ji said. "Every fund could help each other to find different opportunities and lower the risk of fighting alone. We focus on similar sectors but with different stages. With each other's help, we could have more comprehensive information to make fewer strategic mistakes."
PIZZAS AND PRINTERS
These funds have made a big splash in their domestic market. Among the roughly 300 companies Legend Capital has invested in are social network Renren, once hailed as Chinese equivalent of Facebook, and Joyo.com, an online bookstore acquired by Amazon in 2004 to become its local subsidiary.
But many of their most high-profile deals had taken place overseas.
Hony Capital has recently teamed up with its parent company to lead the latest financing round of US startup WeWork. The office space firm raised about $750 million from its series F round of fundraising, giving it a valuation of around $16 billion, according to one person with direct knowledge of the matter.
The investment came two years after Hony hit the hit headlines for its $1.54 billion acquisition of UK restaurant chain PizzaExpress.
Not to be outdone, Legend Capital participated in its own, recent offshore deal. In April, it joined Shenzhen-based Apex Technology and PAG Asia, the private equity buyout firm of Hong Kong investment firm PAG, snapping up US print giant Lexmark in a deal valued at $3.6 billion including debt.
According to the firm, outbound investments, mainly in the US, Korea and Japan, currently account for 15% to 20% of its assets under management totaling Rmb28 billion ($4.2 billion), while that used to take up less than 10%.
Hony is equally bullish. The investment company has amassed Rmb6.5 billion ($9.76 billion) under management across 10 funds since its establishment in 2003 and closed its Fund VIII, a $2.7 billion US dollar fund in April.
After this aggressive fund-raising, Hony still has room for more outbound acquisitions and is keen on the hospital, food, and consumer companies, according to Hony founder and chairman John Zhao.
"Apart from becoming the world's factory, China is also the world's market," he said. "To meet the needs of this market, we have to use capital to acquire products, technologies and services [overseas]."
Legend Star, founded in 2008, currently manages two funds with a scale of Rmbl.5 billion ($230 million). It is putting that money to work attempting to help China achieve its plans of eclipsing the US when it comes to tech innovation, helping fund and train entrepreneurs in Zhongguancun, sometimes dubbed the capital's "Silicon Valley".
Perhaps more impressive than the deals Legend's funds have entered in those they have got out of. Legend Capital has completed about 40 exits through IPOs in mainland China, Hong Kong, New York and Taiwan, and another 40 through mergers and acquisitions.
According to its chief executive Chen Hao, M&As have become more important as an exit route for Chinese VC and PE firms following the two IPO freezes since late 2012. Beijing last November lifted its latest ban on new listings, but has since slowed the pace of IPO approvals.
"For us, we should no longer purely rely on IPOs," he said. "We have to pay more attention to M&As and other [ways to exit a deal]. While IPOs have become more difficult due to [regulatory] changes, M&A has become more active."
The funds are taking advantage of a major trend with this strategy. Last year saw both domestic and outbound M&As reach record annual volumes of $620 billion and $105.4 billion, respectively, Dealogic data shows. This year, Chinese outbound acquisitions had hit $164.6 billion by early September.
CHIP AND WIN
It is clear that these funds have proved for successful for Liu Chuanzhi and the company he created. The question facing investors is how much the profit contribution of these funds should be allowed to make up for flagging returns at Lenovo.
The numbers are clear. Legend Holdings, the parent, managed to generate Rmb4.66 billion ($700 million) of net profit last year, up 12% year-on-year despite flagging revenues at Lenovo. That was largely the result of its financial investments - including those from the three funds. These investments contributed almost 90% of the profits over the year, giving a return around 121% more than they had the year before.
The uncertainty among investors about how to value a business combining a huge, slow-growing legacy asset with high-yielding investment funds explains some of the reason for Legend's poor stock performance, according to executives.
Legend Holdings listed in June 2015, turning to the market more than a decade after Lenovo made its Hong Kong IPO. The parent company raised $2 billion through its initial public offering, marking the fifth-largest IPO in Hong Kong last year, according to Dealogic.
But Legend's stock price has plummeted in the secondary market. By August 11, the stock had fallen around 55% from its IPO price of HK$42.98, compared to a roughly 15% drop in the Hang Seng index over the same period.
According to Liu and a few senior executives at Legend, the sharp drop was mainly due to the market volatility since last summer's stock market turmoil in mainland China and investors' limited understanding of Legend's sprawling business lines.
"Our stock price used to be closely linked with Lenovo's," he told reporters on the sidelines of a conference. "The market didn't know about Legend's other businesses well. I think it will take a while for the market to figure out what our new pillars [of growth] are."
He added that Legend had no plans to reduce its holding in the computer maker despite slumping PC sales.
Lenovo saw its global PC shipments fall 2.3% in the second quarter this year, slightly lower than the global drop of 4.5%, according to market research firm IDC.
While Lenovo posted about $44.9 billion in revenue last year - accounting for 95% of Legend's total revenue - the tech giant nevertheless reported its first annual loss in six years due to slow PC sales and fierce competition in China's smart-phone market Lenovo posted a net loss of $128 million last year, compared to its net profit of $829 million in 2014.
"In terms of revenue, Lenovo still accounts for more than 90% of the total... But in terms of profit, its proportion, which took up more than 50% [of Legend's], has dramatically declined," Ning Min, the chief financial officer of Legend, said in a small group interview on July 8. "We aim to offset the risk [of Lenovo's business] through our financial investment and other strategic investment."
Equity investors typically prefer focused plays over sprawling conglomerates. Legend is trying to defy this preference.
That will be a tough for the firm to achieve. But if its investments continue to perform as well as it does, it stands a decent chance.
Besides, the company has long proved it will not shirk from a challenge. After all, that's how legends are born.
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Submitted by ACN Newswire, ACN Newswire on Friday, 30 September 2016 at 8:15 AM
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