When Chinese billionaire Wang Zhenhua was detained by Shanghai police last week, the move triggered an investor exodus that removed more than $4 billion worth of market value from his company, sent its dollar bonds tumbling, and possibly preventing his company from accessing funding in the future. Wang may be part of a criminal investigation involving suspected molestation of a minor, but that has not been verified. Local police stated via a social media post they were holding two suspects in custody, one a 57-year-old with the surname Wang.
Wang’s company is called Future Land. The company announced he will be replaced as chairman by his son, and the Shanghai Public Security Bureau said he could not comment. Other real estate firms associated with Wang slumped in value while competitors circled. Wang’s company owns more than 100 shopping malls in China. The company had 27 billion yuan in debt expected to come due within the next 12 months.
Perhaps more problematic, Moody’s S&P Global Ratings, and Fitch have all placed the billionaire’s company on a “negative credit watch” as they wait to see what type of fallout will occur from his arrest. This is common with Chinese companies within which one or two “key men” may serve as powerful executives owning more than half the company. If a key man falls from power, then the company often goes with it. The issue has a name, “key man risk,” and has led many investors to be wary of privately held Chinese businesses.
“China’s private firms tend to be headed by powerful leaders, with elevated levels of control over their companies’ operation compared with international peers,” observed Li Zhanjun, a chief researcher with the China Real Estate Association. Ding Haifeng, a consultant with Integrity Financial Consulting in Shanghai, agreed. “Lots of founding members of family businesses in China worked hard and behaved themselves when they amassed fortunes in the early days, but some of them let complacency creep in after becoming super rich,” he said, recommending investors pay attention to succession plans when the first-generation entrepreneurs age out of business control.
Wang is a first-generation entrepreneur, however. He began his career in a textile factory before setting up his own factory in 1998 and, soon after, branching into real estate using just under $300,000 of his personal money. He founded Future Land in 1993 and owns a 70 percent stake. Future land announced Wang’s son will take over his position.
Tell us what you think:
- Would you be worried if you had invested in Future Land?
- Is it a good idea to invest in companies where one person has most of the ownership?
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