Liu Chuanzhi made his name as one of China's premier technology entrpreneurs, building Lenovo into the world's biggest PC maker and one of the country's few truly global brands.
Now, as we reported in part one, Liu is expanding his Legend Holdings conglomerate beyond the 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
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 Rmb1.5 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 smartphone 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 preferencen.
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.