Real estate and finance conglomerate Baoneng steps into deep debt as its barbaric expansion on automaking and grocery failed to turn a profit.
Baoneng GFC under construction, it is a landmark of Liaoning's Shenyang. Photo from CFP
By HUANG Yu
Years of expansion have carried real estate and finance conglomerate Baoneng Investment Group (Baoneng) to the brink of mass default.
The first hint of trouble came in June last year when subsidiary Qoros Auto went delinquent on a 1.6-billion-yuan (US$250 billion) loan. A state-owned fund gobbled up the bad debt, but a much bigger problem is on the way and one that may be too big for even the most enthusiastic debt eaters.
Earlier this year, many Baoneng employees and suppliers were laid off or went unpaid. Qoros Auto canned 60 percent of its workers and the group as a whole is said to have let go about a fifth.
The symptoms are showing first in the automaking extremities, but the disease may already have eaten away at the entire body corporate. Core businesses - real estate and finance - are being put through the mill by regulators as the property market is cooling down, so simply spending less will not turn things around this time.
The market has been turning a blind eye to Baoneng’s plight for quite some time. It wasn’t until June that Dagong Global Credit downgraded Baoneng's investment vehicle Jushenghua from “stable” to “watch list.” This month, Baoneng was put on a national credit blacklist, demanding the company to pay 6.8 billion yuan.
Jushenghua is 87 billion yuan in debt, 40 billion of which is due within a year. In addition, it is the guarantor of 42 billion yuan borrowed by its debt-laden shareholders, principally Baoneng, with 67 percent of Jushenghua. Baoneng has pledged almost all of its shareholding (95 percent) to make up for its own financial shortfalls, a plan somewhat akin to trying to sell your car to pay for a car crash.
Much of the debt is already delinquent. In July, Baoneng defaulted on 2 billion loans and Jushenghua failed to fulfill its guarantee. Jushenghua is “working with the lenders” to come up with a repayment schedule, and attests that the loan will be paid off by the end of the year. In August, China Huarong Asset Management sued for another 4 billion yuan.
The trouble began when Baoneng decided to make cars. YAO Zhenhua, one of the brothers who co-founded Baoneng, started Baoneng Motors in 2017. Since then, he has put more than 50 billion into the course.
Baoneng Motors acquired Qoros Auto and Changan PSA, two closely watched automakers at that time. It built factories in nine cities to churn out 2.2 million cars a year. With mass production nowhere in sight, Baoneng opened 800 dealerships across the country. The spending spree didn’t stop even when Qoros crashed. Leopard, another automaker with very little experience in actually making cars, was snapped up and pushed into Qoros’ toxic niche in the Baoneng ecosystem.
Investments didn’t pay off. Baoneng Motors released the Qoros 7 in September and no one noticed. An electric SUV, scheduled for October, has been indefinitely delayed due to late payments to suppliers, but once again, no one is eagerly awaiting delivery.
Meanwhile, a new grocery business is also on the skids. Baoneng Grocery has built warehouses in 100 cities and set up 2000 community pick-up locations and planned to open another 5000 this year. This is highly unlikely, as Baoneng seems to have run out of money to burn.
Real estate and finance are the real problems. Jushenghua profits are down 19 percent. A feud between the Yao brothers has not helped, but it’s the government credit squeeze that is really choking the life out of Baoneng. The company has staged a few garage asset sales, mostly shares in partial subsidiaries, to repay its debt. Jushenghua has put up for sale 89 percent of a wholly-owned real estate subsidy, asking 11 billion yuan. The group’s matryoshka ownership model is helping no one.
Automaking and groceries have got to go, or at least be downsized to hobbyist level. Dealerships are already shut down as part of what Baoneng laughingly calls a strategy adjustment. The grocery stores are managing to close down themselves without too much intervention from either Yao brother. But Yao Zhenhua isn’t done with automaking quite yet.
In June, he set up a deal with the Guangzhou government to provide 12 billion yuan to Baoneng Motors in exchange for a new headquarters in the city, a showpiece of which any modern metropolis would be justly proud.