There's never a good time for a company to have its chairman under investigation. But news that Chinese authorities have detained Huang Guangyu, the country's wealthiest tycoon, could hardly have come at a worse moment for his company, consumer electronics retailer Gome Electrical Appliance Holdings. Known as the Best Buy (BBY) of China, Gome has tapped into the demand for household appliances by China's burgeoning middle class to become the country's biggest retailer. Now, with the Chinese economy suffering a dramatic slowdown because of the global financial crisis, Gome cannot afford the distraction of a prolonged legal battle involving its founder.
What's happening to its chairman remains unclear. Trading in Gome shares was suspended on Nov. 24 in Hong Kong in the wake of Chinese media reports that Huang has been detained in connection with alleged stock manipulation of a company owned by his brother. In a statement to the Hong Kong stock exchange, Gome said it was "not in a position to confirm the accuracy of the information in the newspaper articles."
A spokesman for public relations firm The Brunswick Group said the company was attempting to investigate the status of 39-year-old Huang and charges against him. The Brunswick spokesman added that Gome executives had been unable to reach Huang, who was reportedly detained on Nov. 19. Gome declined to comment directly to BusinessWeek.
According to Chinese media reports, Huang, whose net worth of $6.3 billion ranked him as China's richest person in the 2008 annual Hurun Report on the country's most affluent, is under investigation over unusual price movements of Shanghai-listed pharmaceutical and medical equipment company Shandong Jintai Group. The company, controlled by Huang's brother Huang Junqin, saw its shares surge more than 900% in the first eight months of 2007 before they were suspended.
Huang's is a typical rags-to-riches China tale. He and his brother began hawking radios and other electrical components from a roadside stall after he moved to Beijing as a teenager. He eventually built his business into the country's largest retail chain [BusinessWeek.com, 9/10/08], which he listed in Hong Kong in 2004. He is the company's largest shareholder with 34%. Last October, Gome became the first Chinese retailer to team up with Dell to sell the U.S. company's computers in its stores.
The alleged arrest of Huang does not come as a complete surprise. The fast and loose business methods by which several high-flying Chinese tycoons have amassed huge fortunes can run afoul of the law. Earlier this year, Shanghai's most successful property developer, Zhou Zhengyi, received a 16-year sentence in connection with a scam in which social security funds were channeled illegally into a property development. The scandal also resulted in the sacking of Chen Liangyu, Shanghai's Communist party secretary.
Room to Grow
Huang's travails also underscore the risks one takes when investing in private-sector Chinese companies listed overseas. Huang is Gome's founder, and though he is not involved in day-to-day running of the company, any tarnish to his reputation is a huge liability to the company. "If the chairman has problems or is put in jail, it could affect suppliers' confidence," says Keith Li, an analyst at CIMB-GK in Hong Kong who covers Gome. "That could be disastrous for the company."
Gome has grown aggressively in recent years thanks to the demand for household appliances from China's fledgling middle class, but there's still plenty of room. Although Gome is the country's largest retailer, it still controls only about 5% of China's highly fragmented market. Li projects profit will grow 18.7%, to $353 million, on sales of $7.4 billion in 2008.
However, Gome is now particularly vulnerable to the slowdown as Chinese consumers rein in their spending as part of the global slowdown. On Nov. 21, the last day of trading before the suspension, Gome's shares were down 77% this year. Li expects same-store sales to fall in 2009, and predicts the stock will plunge once trading resumes. "Why bother to invest in a company you don't feel comfortable in?" he says.