going,gome,gone.doc

Business in China
Going, Gome, gone?
Nov 29th 2008 | HONG KONG
From The Economist print edition, page 69

China’s richest man disappears, and his company hits a wall

WHATEVER your notion of what constitutes good corporate governance for a listed company, having an important executive arrested is a problem. But not even being able to say whether, or why, an executive has been arrested is worse. Such is the lot of Gome, China’s largest electronics retailer, with 12% of the market, about half as much again as its nearest rival. In a few months Gome has gone from an example of extraordinary success, as it served China’s pent-up consumer demand, to an example of the murky and fragile state of Chinese business.
Gome is in trouble partly for reasons beyond its control: the impact of an economic slowdown on clearly chastened Chinese consumers. But it is also at risk because of the way it is managed. In September Gome’s founder and chairman, Huang Guangyu (pictured), was being described as Asia’s equivalent of Sam Walton, the founder of Wal-Mart. The Hurun Report, a newsletter, calculated that he was China’s richest man, with a fortune of $6.3 billion. Approximately $2 billion of that came from a 36% direct stake in Gome, and the rest from a hotch-potch of other investments in property, shares and an unusual private company that owns 450 of Gome’s 1,300 branches. Mr. Huang’s business dealings have raised questions in the past. In 2006 he was investigated in relation to a large government loan which was said to have funded Gome’s initial growth. But other than an announcement of exoneration, details of the case were never disclosed. Any residual concerns were allayed to some extent by Gome’s extraordinary growth. In the past two years it has bought out two rivals and opened more than 100 branches. Its revenues grew by 72% in 2007, and increased by 20% in the first nine months of this year, driven by demand for televisions to watch the Olympics and for washing-machines and refrigerators to furnish new homes.
Along with this growth, however, came an increase in debt both to purchase inventory and to pay for expansion. Gome’s share price started to fall in June, along with the share prices of other Chinese retailers, as it became apparent that China’s housing boom was losing momentum. On November 18th, for no apparent reason, Gome’s share price parted company from those of its competitors, and the slide suddenly became a rout.
Six days later a website run by Caijing, a business magazine, reported that Mr. Huang had been detained by police on November 19th for insider trading in the shares of Shandong Jintai Group, a pharmaceutical company controlled by his brother, the share price of which had soared and then crashed last year. Police in Beijing confirmed that Mr. Huang was under investigation, but did not give any further details. Other Chinese publications reported that Mr. Huang had been detained as part of an investigation into bribes paid to government officials in exchange for the right to list on the Hong Kong Stock Exchange in 2004. Some reports suggested that political change in southern China, where Mr. Huang is from, may have altered the regulatory environment to his disadvantage.
In the face of all this speculation Gome has been at a loss. The company could not even confirm whether or not Mr. Huang had been detained, saying only that it was “making necessary inquiries” in an effort to “verify the allegations”. Trading in Gome’s shares on Hong Kong’s stock exchange was suspended on November 24th. The stock exchange requires companies to provide information on factors which could affect the share price. Gome’s response is that it cannot provide information it does not have—an argument that may provide legal cover, but is hardly reassuring. Mr. Huang himself has vanished.
Gome’s big suppliers have pledged their support for the company. They would certainly not want to lose such a big distributor in today’s difficult economic climate. Gome’s accounts show that a large bond must be refinanced by May 2010. No one extends credit these days without feeling confident about the recipient. If Gome does not change, it will be gone.