China’s Legend Holdings looks beyond technology for growth

Key officials outline the firm’s thinking, as it battles sagging computer sales, a slumping stock price, and the reality it has missed the mobile internet wave

PUBLISHED : Tuesday, 20 September, 2016, 12:14pm
UPDATED : Tuesday, 20 September, 2016, 12:14pm

Officials at Legend Holdings Corp, owner of the Lenovo brand of personal computers and mobile phones, say the business is shifting its emphasis towards investment in consumer technology and lifestyle-related services, as the company bets big that China’s “new economy” will help it weather the global slump in sales of computers and mobile phones.

The group’s change in priority has come after the painful realisation that one of China’s largest conglomerates had missed the mobile internet wave that propelled Chinese companies such as Tencent Holdings and Xiaomi Corp to new heights.

The pivot also comes as Legend’s stock valuation remains depressed.

Since listing in Hong Kong in June 2015, Legend Holdings has lost half its value after the personal computer and mobile phone businessof its 31.5 per cent owned subsidiary Lenovo Group, also listed in Hong Kong, took a beating in the consumer markets.

Its recent first half figures show exactly what a challenge lies ahead.

Half-time net profit declined 36 per cent year on year to 2.58 billion yuan, while revenue in the same period fell 5 per cent to 135 billion yuan.

Technology, accounting for almost 93 per cent of Legend’s total revenue, contributed 27.8 per cent of net profit, weighed down by a 7 per cent drop in personal computer sales and a 6 per cent dip in sales of mobile devices.

Legend’s non-information technology sector, which includes strategic investments in financial services, agriculture, car leasing and dental clinics, plus its three financial investment arms, contributed 7 per cent of revenue but delivered 72.2 per cent of profit. While its agriculture and food sector businesses turned profitable for the first time in the first half.

We’re not spreading resources across many areas.We’re like snipers, targeting a few quality projects
Ning Min, senior vice president of Legend Holdings

Ning Min, senior vice president of Legend Holdings, insists the company has no plans to slash its holdings in Lenovo despite the poor share performance.

But he adds that key to moving forward is now its three investment arms – Legend Star, Legend Capital and Hony Capital – along with the group’s strategic investments, which are now betting heavily on new frontier technologies for rapid future growth.

Together the three investment arms manage total assets of nearly 100 billion yuan, and Li Jiaqing, Legend Capital’s managing director, offers a clever snapshot of how the company now sees its future strategy.

“We’re not spreading resources across many areas.We’re like snipers, targeting a few quality projects.”

At the core of that principal, is what the group calls its “synergy strategy”, whereby each of its units support the others financially and intellectually.

Legend’s non-IT business is now being driven by what the company calls “dual engines” – strategic investments that don’t have a clear exit strategy, but in which it usually holds a majority stake and direct financial investments.

The operations have different priorities, but essentially focus on telecommunications, media and technology, artificial intelligence and smart manufacturing, healthcare, and “innovative consumption”, which includes technologies such as car-hailing apps.

Ji Chaofeng, the managing director of Legend Holdings’ asset management department, explains a start-up has different needs in its initial, growing and expansion phases.

“Legend is able to cater to their different demands with its angel, venture capital and private equity funding,” he said. “Three arms are in the same lane, pursuing opportunities at different phases.”

Ji said executives from the three investment firms routinely meet at a restaurant to exchange information and experiences on particular topics, such as TMT.

A very good example of their cooperation is CAR Inc, an auto leasing firm Legend Capital backed in 2005.

After some tough initial years, in 2010 Legend Holdings stepped in and extended its support with a combination of equity and debt financing.

In 2014, CAR then listed in Hong Kong and Legend still retains 23.77 per cent of the shares. CAR’s net profit in the first half more than doubled to 1.06 billion yuan.

The trust built up with CAR enabled Legend Capital to have the confidence to be an early investor in a related venture calledUCAR, a chauffeured car service provider, which saw its revenue surge more than 6-fold to 2.32 billion yuan in the first half. It listed on China’s NEEQ start-up board in July.

Another auto industry deal involving Legend Capital and Hony Capital was Linglong Tire, a tire manufacturer which listed in Shanghai in July.

Legend Star, meanwhile, the company’s angel investor which focuses on emerging sectors, invested in iDreamsSky, a mobile game publisher, and later recommended it to Legend Capital, which invested in the firm before it listed on Nasdaq in 2014.

Hony Capital, along with Tencent Holdings and PCCW, last month invested in Hollywood film studio and distributor STX Entertainment.

Wang Mingyao, a partner with Legend Star, explains that without the backing of Legend Holdings the angel fund wouldn’t be able to invest across multiple sectors with a long-term commitment — a very different approach to most angel funds that generally focus on one area.

“Without Legend Holdings, we also wouldn’t appeal to many start-ups because when they choose investors, they not only look for money but also industry expertise.”

Target companies receiving funding from one Legend investment arm can also look for synergies with other Legend backed-companies.

For example, a lithium battery manufacturer backed by Legend Capital supplies batteries for the electric cars used by UCAR, a chauffeured car service provider also backed by Legend Capital.

And a technology that enables automatic fruit picking, backed by Legend Star, was able to find an end user in Legend’s blueberry farm.

Private equity managers say the advantage of Legend’s business model is that its financial investments actually serve to build a “project pool” in which the three arms can leverage outside capital to invest in a wider range of start-ups.

Legend’s strategic investment arm can then pick the best from the pool, and make a larger capital bet in those start-ups with more promise.

However, this selective approach has been criticised by both staff and some outside observers as too conservative, contributing to missed opportunities for Legend.

One former investment banker, who requested anonymity, said that while there wasn’t a problem with Legend’s cautious approach, it has seen some problems in execution because of the lack of capable employees to carry out the grand strategy.

“At the managing director level there is a shortage of talent,” he said.

John Zhao, another executive director at Legend Holdings, adds the company’s long-term financial investments are an important complement to its IT sector holdings, as it mitigates the latter’s cyclical risk.

“Last year the financial investment arms contributed all the company’s profit, which proves the advantages of the Legend model. I have no idea why investors are so bearish.”

Ning Min, senior vice president of Legend Holdings, said it is too simplistic to compares its investment model with any other, but added that the nearest “match”, if there ever was one, would be Fosun International, another conglomerate with industries and investment.

Zhao Xi, vice director of the China Hedge Fund Research Centre under Shanghai Jiaotong University, said that multi-business conglomerates such as Legend are a hard sell around the world as investors have difficulty figuring out whether the various businesses are producing synergies, and whether the valuation is fair given that the different sectors may have diverging performances.

Legend’s listing in June last year was also bad timing, according to Zhao, just prior to the rout in the mainland Chinese stock market that dragged Hong Kong down with it.

“Other large conglomerates like Fosun International also saw their share prices suffer a lot,” he said.