Detained Billionaire Developer Highlights Key Man Risk in China
Detained Billionaire Developer Highlights the Biggest Risk in China
(Bloomberg) -- It’s one of the least talked about dangers for investors in China, but it has the potential to be the most damaging: key man risk.
Shareholders of Future Land Development Holdings Ltd. learned that the hard way this week after Shanghai police detained Wang Zhenhua, the firm’s billionaire founder and controlling stakeholder. The news sparked a record two-day tumble in the stock, sent the company’s bonds plunging and fueled speculation it may have to sell assets to rivals. S&P Global Ratings placed Future Land on negative watch Friday to reflect the potential reputational damage.
It’s the latest in a spate of recent incidents where Chinese executives synonymous with their companies came under fire and investors paid the price. While key man risk is an issue around the world, it can be particularly acute in China because the nation’s corporate founders play outsized roles. About 13% of listed Chinese businesses have a shareholder who owns a stake of 50% or more, according to data compiled by Bloomberg.
The real estate industry is especially vulnerable given the importance of personal relationships, or “guanxi.” Developers often depend on the government’s good graces for land plots and tax breaks.
“Future Land has been growing really rapidly and Wang is the key person behind it,” said Jackson Wong, an asset management director at Amber Hill Capital Ltd. in Hong Kong. “He has all the networks to help the company win contracts.”
Whether Future Land -- and S-Enjoy Service Group Co. and Seazen Holdings Co., two other real estate firms with links to the billionaire tycoon -- can wholly recover isn’t certain. Wang’s detention comes at a time there’s already significant pressure on developers, including capital-raising constraints and receding home-price growth in China’s biggest cities.
Future Land’s Hong Kong-traded shares continued their decline Friday, slumping as much as 2.5%.
There also isn’t much clarity on the nature of Wang’s situation. Police in Shanghai’s Putuo district said in a social media post Wednesday that they were holding two individuals for suspected molestation of a minor, identifying one of the suspects as a 57-year-old with the surname Wang. Scant details emerged Thursday and calls to Future Land’s investor relations and media departments weren’t answered.
Future Land said in a Hong Kong exchange filing late Wednesday that Wang will be replaced as chairman by his son, Wang Xiaosong, and the company’s operations are normal.
“Wang’s business empire has been heavily dependent on himself,” said Louis Tse, managing director at VC Asset Management Ltd. in Hong Kong. “His son took the helm, but he doesn’t have a reliable track record and is yet to convince investors.”
Tse said it was almost certain that Future Land will face higher refinancing costs in the bond market, as well as a reduction in sales, particularly because most of its projects are residential and there’s a risk its brand name may be tainted. As well as hundreds of apartment projects across China, Future Land, which employs almost 23,000 staff, owns more than 100 shopping malls.
Investors had been treating Future Land like a top-tier developer, and it was enjoying a valuation premium, Amber Hill’s Wong said. Now, “it remains a question whether his son is capable enough to at least maintain Wang’s networks.”
--With assistance from Qiuting Bo, Amanda Wang and Amy Li.
To contact the reporter on this story: Jeanny Yu in Hong Kong at jyu107@bloomberg.net
To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net, Michael Patterson
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