By the mid-1970s Hong Kong tycoon YK Pao controlled nearly 500 tankers, according to his daughter Anna Pao. In her biography – titled YK Pao: My Father – she says that at its peak his private armada was only a little smaller than the Soviet navy.
But Pao turned gloomy on shipping, sensing more opportunity elsewhere. “He sold and he sold. People outside and inside the company thought he might be off his rocker,” his son-in-law Peter Woo recounted to Forbes.
Pao pumped the proceeds into Hong Kong property at a time when concerns were mounting about the then-British colony’s prospects after sovereignty passed back to China in 1997.
It seemed counter-intuitive, but the diversification paid off. When the shipping market hit rock bottom in the early 1980s, Pao was debt-free and had already taken control of Wharf, a property conglomerate that now owns shopping malls generating 9.5% of Hong Kong’s retail sales.
Fast forward to contemporary China, and another tycoon is trying to make money from moving between the worlds of property and shipping.
But in this instance Zhang Zhirong seems to be taking the opposite path to Pao – selling off property assets to double down on his shipping empire.
Zhang hit the headlines when he was accused of insider dealing in CNOOC’s acquisition of Canadian oil firm Nexen (see issue 162). His shipbuilding firm Rongsheng, once the world’s largest in terms of orders, has been in trouble too. Lloyd’s List reported in July that hundreds of workers had protested outside a Rongsheng shipyard after massive layoffs (reportedly up to 8,000 since last year) and in August, Rongsheng reported a Rmb1.2 billion ($207 million) interim loss.
Ominously, Rmb10 billion of its debt is due to mature within the next year and the company was forced to raise $180 million by selling convertible notes to a third party, probably a buyer controlled by Hong Kong property giant New World Development, says the Hong Kong Economic Journal.
But Zhang seems to be hoping for salvation via his real estate firm Glorious Property, after making an offer of HK$4.5 billion ($580 million) to acquire the 32% stake in Glorious that he doesn’t already own.
Investors may be minded to accept the proposal, which represents a 50% premium over the stock’s average trading price in October.
How is Zhang going to finance it? Glorious says that the cash for the offer will come from an “external loan facility”. The identity of the lender is unclear but the Hong Kong Economic Journal reports that a “financier that has been active in Hong Kong and China” may back Zhang in trying to complete the maneouvre. (The hint from the HKEJ is that the backer is New World again.)
On the same day that Zhang offered to spend millions taking Glorious private, Rongsheng also told shareholders that a local government is seeking a court order to collect Rmb1 billion in late payments (as well as compensation) from the shipping firm.
But Rongsheng’s dire finances might point to the logic of the property deal. Zhang’s buyout offer is at a price 39% below the company’s book value. This means for HK$4.5 billion he’ll get full control of real estate assets worth HK$23 billion. “It is about selling the house to save the ship,” Private Economy News believes, suggesting that Zhang’s plan is to sell off assets in Glorious to raise the cash needed to keep Rongsheng afloat.
China Business News has also been watching developments, noting that it isn’t unprecedented for Hong Kong developers like New World to come to the rescue of some of their more troubled mainland counterparts. Wharf did so itself when it took a strategic stake in real estate firm Greentown (see WiC154).
If the bid succeeds, and Zhang is then able to sell of some of his property assets to raise cash to recapitalise Rongsheng, he will be making a big bet that the worst is over for the troubled shipping industry.
That sounds like another major punt but one that Zhang – faced with an ominous financial crunch – has little choice but to make.
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