Property deal news hits Gome share price

PUBLISHED : Thursday, 29 September, 2011, 12:00am
UPDATED : Friday, 08 May, 2015, 9:12am


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Shares of Gome Electrical Appliances Holdings, China's second-largest home-appliance retailer, tumbled by as much as 14 per cent after the company announced plans to set up a venture to invest in mainland property.

Gome closed 11 per cent lower at HK$2.34 yesterday, compared with the Hang Seng Index, which fell less than 1 per cent.

Analysts said the retailer's move into the property market would cloud its prospects and affect its core business.

The Beijing-based firm said in a filing to the Hong Kong Stock Exchange on Tuesday that one of its subsidiaries had signed an agreement with Beijing Eagle and Beijing Gome, both owned by Gome's jailed founder Wong Kwong-yu.

'With the property joint venture, the company could increase its portfolio of stores that operate from self-owned properties, thereby lowering operating costs and increasing the margin of the group,' it said.

The capital for the venture will be 200 million yuan (HK$243.9 million), with 45 per cent held by Gome, 30 per cent by Beijing Eagle and 25 per cent by Beijing Gome.

Gome's capital contributions to the property joint venture would be financed by the group's internal resources and/or bank borrowings, the statement said.

'It's a clear sign that Gome would like to follow its major rival, Suning, to tap the commercial property business,' Liu Buchen, an expert on the home-appliance market, said.

He said the business environment in the home-appliance market had been tough this year because of rising labour costs, surging rents and cut-throat competition.

Gome, like many other cash-rich retailers, had been attracted to property development as a high-growth addition to its main business.

Liu said retailers often chose to build large commercial projects, including office buildings, supermarkets, shopping centres and entertainment facilities, to enjoy the earnings from rents and capital appreciation.

Suning, which runs the largest sales network of electrical appliances in the country, earlier said it aimed to build 300 shops, 50 large shopping centres and 100 hotels by 2020, and become a leading developer.

'To develop property projects will demand huge amounts of money. Although Gome and Suning are both cash-rich companies, their debt ratios are also very high. This could be a potential risk for them in the property market,' Liu said.

Gome, which operated 936 shops across the nation by June, plans to open 260 shops this year. Suning owned 1,348 shops at the end of June.

Wong Kwong-yu, who is serving a 14-year jail sentence for bribery and insider trading, and his wife Du Juan hold about 32 per cent of Gome.